Reporting 401(k) and IRA Rollovers

Congratulations!  You established your self-administered Solo-K and you are in the process of rolling over funds into the plan.  You have been advised of reporting 401(k) and IRA rollovers into your new plan, and you want to make sure you do this correctly.  Let’s face it…you don’t want a letter from the IRS telling you it appears you owe them taxes only due to the fact that you skipped a very vital process in reporting 401(k) and IRA rollovers into your new Solo-K plan.

With the plan established, you request rollover funds from an old employer’s 401(k) plan or IRA.  The funds are made payable to your new Solo-K via check, wire or ACH and you never received constructive receipt of the funds. You have the funds in your new account, and you might be thinking you are done….I mean you do have the rollover funds in your account now, so what else is there to do?

Reporting 401(k) and IRA Rollovers

But, the following January you receive a mailing from your previous employer’s plan or IRA custodian and the envelope contains a 1099-R Form….and, it is copied as well to the IRS!   You may be confused, the form seems complicated, and you wonder, “did I do my rollover correctly?  Why am I receiving this mailing?”

Well, take a deep breath….in the vast majority of cases, you did not do anything incorrectly, and the previous plan is supposed to be providing you and the IRS this form.  Why?  Because like the old saying goes, “the left hand is checking what the right hand is doing.”  In simple terms, the 1099-R is showing that funds were distributed by the previous 401(k) administrator or IRA custodian and, if coded correctly, reporting that the funds were a non-taxable event.  Let’s call this the left hand.  Now, you must correctly report to the IRS the distribution of the funds from the previous plan as well and confirm that it is not a taxable event.  This is done through your 1040 tax form.  Let’s call this the right hand.  In most cases, if both the right and left hands are saying the same thing, both parties have done their correct reporting.  However, and don’t freak out, the IRS could still audit this event to confirm that all funds rolled over did enter the new plan as a non-taxable event.

What Does the 1099-R Tell the IRS?

If prepared correctly, it tells the IRS that the previous plan administrator/custodian distributed the funds from the plan/IRA and it is recorded as a non-taxable event.  See the attached IRS educational document that fully explains how to complete a form 1099-R or Form 5498 (IRAs).  What are some of the key sections of the 1099-R that you should focus on?

Box 1 — Indicates the total amount that was distributed from the previous plan;

Box 2(a) — Indicates the total taxable amount from the distribution.  In most cases, this amount should (or better be) ZERO/0.  Unless you requested a taxable distribution of some of your funds, this should by ZERO/0 and, if not, you may want to call the previous administrator/custodian to correct this apparent error.

Box 7 — This is a very important box as this is the coding providing to indicate whether the distribution is taxable. Again, as long as you did not take constructive receipt of any funds, this should be coded as “G” (direct rollover of a distribution to a qualified plan, a section 403(b) plan, a governmental section 457(b) plan, or an IRA).  As you can sense, this is important, as this coding is telling the IRS whether you owe tax on this distribution. If incorrectly filled in with a code other than “G”, the IRS may believe/believe that you were in constructive receipt of some or all of these funds and you owe Uncle Sam tax.  So, pay strict attention to this box.

Remember We Said Left Hand, Right Hand?

Okay, so it appears the Form 1099-R is completed correctly….whew.  But, remember, you are not done.  You still need to correctly report the rollover on your IRS tax form 1040 (or 1040A).  How do you accomplish this correctly to satisfy the IRS?

Rollover Coming from a Qualified Plan (e.g., previous employer’s 401(k)) Plan:

  1.  You will enter the full amount of the distribution (rollover) on Line 16(a);
  2.  Provided you did not take any constructive receipt of funds, you will report $0 on Line 16(b);
  3.  In the left hand margin, the IRS wants you to write-in (and make it bold and clear) ROLLOVER; and,
  4.  The IRS wants you to attach a brief note (and it can be brief) explaining that there was a non-taxable rollover  from a previous employer’s plan.

Pretty simple, eh?!

Rollover Coming from an IRA:

  1.  You will enter the full amount of the IRS distribution (rollover) on Line 15(a);
  2. Provided you did not take any constructive receipt of funds, you will report $0 on Line 15(b);
  3. In the left hand margin, the IRS wants you to write in (and make it bold and clear) ROLLOVER; and,
  4. The IRS wants you to attach a brief note explaining that there was a non-taxable rollover from a previous employer’s plan.

Exception — While this rarely occurs with a newly-created, self-administered 401(k) plan, it is possible that you already have an individual 401(k) plan established and you are simply “transferring” the funds into the newly-created self-administered 401(k) plan.  This is not a rollover, and these rules would not apply…you are then merely transferring the funds from the plan “housed” at one institution to your new self-administered (but same titled) plan “housed at another institution.

What if I Take Funds Personally from the Distribution?

DON’T!  Okay, seriously, there may be times that this is wanted/needed.  But, as you can tell from my initial response, personally, I loathe this transaction as people make too many mistakes with a taxable distribution.  I get it….you may feel the need to take a taxable distribution.   If you do, make sure you address the rules and pro’s and con’s of this activity with your tax professional.

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.  One must consult with their respective professional in all such matters.