For anyone who established their Solo 401(k) plan in this current year and rolled over IRA funds into their individual 401(k) plan….this is for you.
You established your self-administered, Solo 401(k) plan. You may have set up your plan up in January or possibly setting it up at the end of the year. You may have set up your plan from “scratch”….meaning no rollover funds coming into the plan…but, more likely than not, you possibly rolled over funds from another plan (e.g., IRA) into your 401(k). This may have been a Traditional IRA or another type of traditional-type of IRA like a SEP (you already know that Roth IRA funds cannot be rolled over in the plan).
Time has passed from when you set up the plan….you think there is nothing else you need to do….but:
You Need to Report the Rollover to the IRS
Yes, there is a checks and balance process for the rollover, and you are one of the cogs in that process…so, it is important to know what you need to do. Before we get to your responsibility, let’s explain the other cogs in the process as that will help explain why you have a responsibility in the process as well.
If you rolled over funds from your previous IRA custodian, that rollover will be reported to the IRS and you. This is done through a 1099-R form. If correctly completed, they will be indicating that the rollover was a non-taxable rollover by entering a code of “G” on the 1099-R. Okay, in simple terms, the custodian is reporting to the IRS that funds were distributed from the IRA….and, if you don’t confirm that information through the “checks and balances” well, you guessed it….the IRS could assume that you personally distributed the funds to yourself and, therefore, owe taxes (and possibly penalties) on that distribution.
Well, good! But, the IRS doesn’t know that unless you confirm that as well.
Well, always review such transactions with your tax professional, but, there is a very simple process by which you will do “your job” and report the rollover of the IRA funds into your Solo-K (also marketed as a Uni-K, Individual 401(k), Self-Administered 401(k). You will report the rollover on your 1040 tax return.
You will report the distribution from your IRA on Line 15(a) by indicating the full amount of the rollover as a distribution. On Line 15(b), you will indicate the amount of taxable income incurred by the rollover. For most of you, this amount will be ZERO.
Is That It?
No. 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..even IF both the taxpayer and IRA custodian did what they are supposed to do. But, that is rare….and, even if they did, you have fulfilled your responsibility in reporting the rollover on your tax return.
Brokerage Firms That Do Not Do Things Correctly?
Believe it or not….many IRA custodians do not execute their end of the process correctly. Yes, you heard that correctly. Many brokerage firms take the incorrect position that if they send the rollover check, ACH, wire, etc. directly to the receiving plan (at another institution), there is nothing to report. They refer to it as a custodian to custodian transfer. When your IRA is rolled over, this is not a “transfer” (e.g., like to like). The rollover is generated from the IRA and being rolled over to the 401(k)…a totally different plan.
You may say:
“Well, who cares if the brokerage firm does not file a 1099-R?” — Well, beside it not being the right thing to do, if you report a rollover on your 1040 but the IRS has not received a 1099-R, they may question your return.
“If the IRA custodian says they do not have to report the rollover, then why should I?” — Again, you want to do the right, not wrong, thing. And, you certainly wouldn’t want it questioned down the road. By reporting it on the 1040, you have at least done what you are supposed to do.
“Anything else I should know about the rollover reporting process?” — If the brokerage firm says they do not need to report the rollover (and, that has happened many times), what else should you do I would ask them to refer you to their compliance departments and inquire why they are not providing you with a 1099-R? The compliance department should give you the right answer. IF, they continue to say they do not plan on issuing you a 1099-R, demand they confirm this to you in writing!! As I have told clients in the past, if you are doing things correctly by reporting the rollover and the IRA custodian has not issued a 1099-R (especially after telling you in writing they do not need to), you have at least done what anyone, including the IRS, could expect.
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.