A friendly reminder to those of you who executed a rollover from your IRA to your newly-established Solo-K plan (also marketed as a Solo 401(k), Self-Directed 401(k), Self-Administered 401(k), Uni-K, One-Participant 401(k)) during the past tax year (2015). This reminder deals with reporting to the IRS the rollover of this IRA so that they know it is not a taxable event.
“But, I Didn’t Take Any of the Money — Why do I Need to Report?”
Well, that’s great! But, the IRS, in the exercise of checks and balances, may not necessarily know that. Let’s explain.
Your previous IRA custodian will be reporting to you and the IRS the rollover of these funds through a 1099-R form. They should be correctly coding the 1099-R to indicate that the rollover was a qualified, non-taxable rollover by putting in the code of “G” on the 1099-R. But, the IRS still expects you to report this information as well (think of it as a check and balance applied to both parties).
You will report the rollover on your 1040 tax form on Line 15(a) by indicating the full amount of the rollover as a distribution. One helpful hint: many of you will believe that you should not do this as you never took any of the money…don’t worry, the IRS considers the departure of funds from a plan to be a distribution…it is just a matter of whether it is a taxable distribution.
On Line 15(b), you will indicate the amount of taxable income incurred by this rollover. For most, this amount should be ZERO.
Is That It?
No. In addition to reporting the rollover, the IRS asks that the taxpayer write “ROLLOVER” in the left hand margin of the 1040 and submit a brief statement attached to your return describing the rollover. This statement can be brief and to the point…simply indicating that you executed a non-taxable rollover by rolling over funds from an IRA to the 401(k) plan.
Now, Is That It?
It should be. Always keep in mind that the IRS has the full option of still following up with the taxpayer, but as long as you executed the rollover correctly, you can clearly show that not only was the rollover executed correctly, but that you received no part of the distribution personally.
Any Final Comments/Suggestions
Yes. You would not believe how many financial service companies do not execute their portion of this process correctly. Some take the position that if they send the rollover directly to the new account as a “custodian to custodian transfer” (versus sending a check made payable to the plan but mailed to you) this does not constitute the preparation of a 1099-R. However, it is still a rollover as the funds are being sent from an IRA to a 401(k).
If this occurs, you can only do what you can do. Call them and request the 1099-R. If they say they do not need to do this, ask them to confirm, in writing, their position on this. If the IRS ever raises the issue, you have not only correctly reported the rollover on your 1040, you have also requested this information from the previous custodian.
As always, the information provided is intended to be educational in nature. It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice. You must always consult with your respective professional in all such matters.