Reporting Rollovers on Your Tax Return

Taxpayers roll over retirement assets for a variety of reasons. Sometimes, they retire or take a new job and move money from their workplace plan to an IRA. Or perhaps they decide to take an IRA distribution that they intend to put back into an IRA within 60 days. Whenever a distribution of plan assets occurs, it is reported on IRS Form 1099-R. This information tells the IRS—and the taxpayer—that unless these funds are rolled over, they will generally be taxed. So, to avoid confusion and possible taxation, you must tell the IRS whether you have rolled over any distributions you took in 2024.

Transfers Versus Rollovers

Unfortunately, determining whether a transaction is a rollover or a transfer can sometimes become confusing. For example, in IRS publication 590-A, the IRS refers to a particular transaction, stating that "The rollover must be paid through a trustee-to-trustee transfer." To keep things simple (and more precise), here is an important rule: transfers typically apply only to IRAs, not to qualified retirement plans (QRPs) such as 401(k) plans. This means that participants who take assets from their workplace plan—even if the funds are paid directly to an IRA—must report this to the IRS. On the other hand, IRA assets that are paid directly to an IRA at another financial organization are considered nonreportable transfers. So, if you have transferred IRA assets from one of your IRAs to another IRA without getting a "constructive receipt" of these assets, no reporting is required.

Direct Rollovers Versus Indirect Rollovers

Let's explore distributions from workplace retirement plans in more detail. For this discussion, we will focus on 401(k) plans but exclude IRA-based plans like SEP and SIMPLE IRA plans. (These plans follow the IRA rules.) Assets from 401(k) plans and other QRPs cannot be transferred to an IRA. This is true even if the assets are paid directly to the IRA custodian or trustee.

• Direct rollovers (ex: QRP > IRA) start with the QRP administrator cutting a check—or electronically sending assets—to the receiving IRA's custodian or the new QRP. Individuals who want to preserve their plan assets as they move them typically choose this direct rollover option. Although the plan administrator will report this transaction as a distribution, the taxpayer will report the assets as being rolled over, resulting in no taxation.
• Indirect rollovers (ex: IRA > participant > IRA) start with a distribution to the plan participant. Like direct rollovers, indirect rollovers can also avoid taxation. But there is a catch. When plans pay QRP assets to participants, 20% of the distribution must be withheld and paid to the IRS as a prepayment of taxes. This is not a penalty but a way to encourage direct rollovers to help prevent retirement plan "leakage." Participants can roll over the distribution within 60 days. They may also make up the 20% withheld amount. However, they must contribute these assets from out-of-pocket funds since the withheld amount has been sent to the IRS. Participants who can roll over the entire amount distributed will likely be entitled to a refund of the 20% withheld amount, assuming that the proper amount has been withheld from their wages and other sources. Any part of the distribution not rolled over within 60 days is subject to taxation, just as any other distribution is.

Reporting Rollovers

Remember that a rollover starts with a simple transaction: a distribution. A distribution does not become a rollover unless and until those assets are appropriately contributed to an eligible plan—typically an IRA or another workplace plan.

Financial Organization Reporting

Because rollovers start with a distribution, IRA custodians (such as STRATA) and employer plan administrators must report them on IRS Form 1099-R. Both the IRS and the recipient receive this form, which includes the amount of the distribution (box 1), the taxable amount (box 2a), the amount of federal tax withheld (box 4), and the distribution code (box 7).

When distributions are rolled over into an IRA, IRS Form 5498 is sent to both the IRS and the IRA owner, showing the rollover contribution in box 2.

Taxpayer Reporting

Taxpayers who roll over 2024 distributions must report this to the IRS on their federal tax return. The IRS will then be able to compare this return with the information provided on Forms 1099-R and 5498. Form 5498 is not required to be sent until the end of May, so you will not receive this information until after the regular April 15 tax return due date. Still, you must report rollover contributions properly to avoid taxation, and your federal tax return instructions will tell you how to do this.

For More Information

Consider using the IRS’s interactive resource on rollover transactions: Do I need to report the transfer or rollover of an IRA or retirement plan on my tax return? Sound professional tax advice may also help you properly report your rollover transactions.

STRATA's Self-Directed IRA Knowledge Center also has articles on IRA rollovers and IRS reporting. Finally, feel free to contact STRATA's self-directed IRA experts with your rollover questions.