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How to Report Rollovers on Your Tax Return

Did you move any retirement savings last year to a new account or provider? Whether you moved money from your former employer’s retirement plan to your new employer’s retirement plan or to an IRA, it will be reported to the IRS as a distribution by your former plan administrator. Even if you didn’t physically handle the money, the IRS considers it a distribution of potentially taxable income. If you do not wish to include the distribution in your taxable income for the year, you’ll need to inform the IRS why this distribution is not taxable to you.  

If you received an IRS Form 1099-R reporting a distribution from your retirement savings in 2023, you may want to consult with a tax professional to ensure you’re reporting the transaction accurately on your IRS Form 1040 tax return, especially if you are dealing with both pre-tax and after-tax or Roth assets. To give you an idea of what to expect, here’s a quick overview of the potential taxation and reporting requirements for rollovers of pre-tax retirement savings from an employer’s retirement plan (e.g., salary deferrals, employer matching contributions, investment earnings).

 

What Is a Non-Reportable Event?

First, let’s eliminate one type of transaction from this rollover article: direct transfers. If you have moved assets directly from one of your IRAs to another IRA, this is considered a direct transfer. Direct transfers are not reported—either to you or to the IRS—and you do not have to account for them on your annual tax return.

Example:
Direct Transfer

You request that Acme Bank send your IRA assets directly to STRATA Trust Company  (“STRATA”). STRATA receives the IRA assets from Acme Bank.

  • You do not have constructive receipt of the assets at any time during this transaction, so this is considered a nonreportable transfer.
  • Neither Acme Bank nor STRATA issues any kind of IRS report in relation to this transfer, and you do not have to address it on your tax return.

 

What Is a Reportable Event?

Rolling over assets from a 401(k) or other non-IRA-based employer plan to an IRA is considered a distribution from the employer’s retirement plan. The IRS considers all distributions a potentially taxable event and they must be reported, although not all instances will cause a tax liability. 

In a direct rollover, the distributing employer plan makes the assets payable to the receiving IRA—either by cutting a check to the custodial financial organization, or by sending the assets electronically. For example, the payee on a check might appear like this: “Acme Bank, for the benefit of John Doe’s Traditional IRA.” The employer will report the distribution to the IRS and to the plan participant, who must also report the transaction on their federal tax return.

In an indirect rollover, the distributing employer plan pays the assets to the plan participant. The plan administrator must withhold 20 percent of the taxable portion of the payment and send it to the IRS as a prepayment of tax. The plan participant then has 60 days to roll over the assets into an IRA (or another eligible plan). For example, having taken a new job, you request that your former employer distribute to you the $100,000 balance in your 401(k) account.

  • The plan administrator sends you a check for $80,000, which reflects the 20% mandatory IRS withholding; $20,000 is sent to the IRS. You may roll over the entire $100,000, but you would have to come up with the $20,000 that was withheld which would be considered a rollover contribution, and must also be reported. 
  • If you don’t roll over the entire $100,000, any amount not rolled over is generally included in income for the year of distribution (except to the extent that the assets are after-tax basis). 

 

Financial Organization Reporting

Organizations such as STRATA report IRA distributions on IRS Form 1099-R. Plan administrators who report employer plan distributions also use Form 1099-R. This form is sent to the IRS and the plan participant, disclosing the amount of the distribution (box 1), the taxable amount (box 2a), the distribution code (box 7), and the federal tax withheld (box 4)—as well as other details.

IRS Form 5498 documents rollover contributions and is also sent to the IRS and the IRA owner. Box 2 shows any rollover contributions that are made in a tax year.

 

Taxpayer Reporting

How you report your rollover contributions to the IRS is critically important. The IRS will match up what you report on your tax return with the information it receives on Forms 1099-R and 5498. But keep in mind that for a rollover completed in 2023, Form 5498 will not be sent to you until the IRS filing deadline at the end of May 2024—well after the normal tax filing deadline. So, while you may not get this rollover reminder before you file your return, you will still need to report the rollover correctly. (If you roll over a 2023 distribution in 2024, or if you roll over assets to a qualified plan, you must include an explanation of this transaction with your return.)

Although the Instructions for Forms 1099-R and 5498 go into more detail, here is the basic concept: your distributions from an IRA or qualified plan will be entered on Line 4a or Line 5a of Form 1040 (if using the long form). To the extent that you rolled over the distribution to an eligible plan, you will exclude that amount from your taxable income and enter the taxable amount (if any) on Line 4b or Line 5b. You will also enter “Rollover” next to Line 4b or 5b, whichever applies.

 

Additional Resources

The IRS has created an interactive resource to help you navigate your rollover questions. Consider reviewing the article, Do I need to report the transfer or rollover of an IRA or retirement plan on my tax return? for more information. It contains guidance on direct and indirect rollovers; on repayments for qualified birth or adoption expenses, for qualified plan loan offsets, and natural disaster distributions; and on numerous other topics.

You can also visit our Self-Directed IRA Knowledge Center for more articles on IRA rollovers and IRS reporting. If you have any questions regarding a rollover associated with your STRATA IRA, contact us—our self-directed IRA experts are ready to help.   

 

Tags: 401k, IRA, IRA Rollovers, IRS Rules, rolllover strategy, rollovers, Traditional IRA