Reporting a Retirement Rollover

You’ll have many jobs, but only one retirement.  You’ll also have many 401(k) plans, but you only need one retirement account. When your done working for an employer, you should consider moving your savings to an Individual Retirement Account (IRA). There are many benefits for doing so, though one downside is there’s often confusion on how to report a rollover to the IRS.  This article will explain both the benefits of moving your account and how to enter the rollover when preparing your taxes.

The Reasons to Consolidate Your Retirement Accounts

It’s important that you take advantage of your employer sponsored retirement plan while you’re working for that company.  Many retirement plans often offer matching contributions, which is free money.  There are also higher contribution limits for employer sponsored retirement plans.  That means you can reduce your taxable burden and save more money for retirement.

When you leave an employer, consolidation of your retirement assets is important.  You may have ten or fifteen jobs over a lifetime. Each of those jobs could have a retirement plan.  Trying to track, maintain, and diversify a portfolio over this many accounts can be difficult at best.  Having all your employer sponsored plans rolled into on account allows you or your financial advisor properly build an investment portfolio and plan for retirement.

In addition to moving employer sponsored retirement plan, you may want to considering consolidating or moving any IRA you own.  There are several reasons for moving an IRA to different retirement custodian.  The first reason is a desire for better service or advice.  Planning for retirement is too important to work with anything less than an experienced and credentialed investment advisor.  It’s also in your best interest to work with one that follows the fiduciary standard.

High investment and advisory costs are another consideration.  Costs are one of the few things that you can control when investing, and low costs translate to more money in your account.  Advisory services should cost around 1% while your investment options should focus on low internal expenses.  Commission based investment products should be avoided due to their high costs and the inherent conflict of interest.

How to Transfer Your Retirement Account

Rolling over an employer sponsored retirement plan follows general IRS rules, though specifics can vary from company to company.  Your retirement plan custodian can provide the details.  For qualified employer plans (401(k), 403(b)7, and 457 plans), there is a mandatory 20% tax withholding if the retirement funds are sent directly to you. To avoid this, you’ll want to request a trustee-to-trustee transfer from the current custodian.

If you are moving an IRA to another retirement custodian, you can either request a direct rollover or have a check mailed to you.  A direct rollover is when the current trustee sends your investments directly to the new custodian.  If you have a check mailed to you instead, you have 60 days to place the funds into a new retirement account.  You can do a trustee-to-trustee or direct rollover as many times as you like during the year, but the IRS only allows one rollover per year if you personally receive the retirement check.

How to Report a Retirement Account Rollover

The custodian where your investments assets were held will send you a Form 1099-R “Distributions From Pensions, Annuities, Retirement, or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.”  Employers are required to send this form by January 31st each year.  In Box 1, the gross distribution amount is reported for account withdrawals that year.  Box 4 reports federal income tax withheld, if any.  Box 7 reports the Distribution Code, which may indicate that the funds were rolled to another retirement account.

The Distribution Code is not always known to the custodian when funds are being transferred out.  If that is the case, the former custodian will enter that the rollover either a normal or early distribution.  Both of these are taxable events, with an early distribution having a 10% premature distribution penalty.  The potential for taxes and penalties mixed with a form showing a distribution without a transfer has made calls about rollovers some of the most frequent calls financial advisors receive during tax season.

Contributions to IRAs, including assets that are transferred into a IRAs, are reported of Form 5498 “IRA Contribution Information.”  This form, unlike the 1099-R, is sent by the custodian that receives contributions or funds from an account rollovers after the tax filing deadline in April.  The reason this form is delayed is because it is used to report any contribution to an IRA and not just rollover contributions.  Contributions are not due until April of the year following the tax year.  The reason for this is that many people do not know their taxable situation until after their taxes are nearing completion.  The IRS extends to contribution deadline to the tax filing deadline in order to allow give people time to know if the contribution is allowed or needed to reduce the tax burden.

Form 5498’s dual purpose causes concern and confusion for many.   The concern is that the IRS will see a rollover as a total distribution.  The IRS won’t, however.  The IRS is also sent a Form 5498 after the tax season is over.  The confusion is how to report the rollover without this form.

To report this rollover, you must either file Form 1040A or Form 1040.  You are unable to file using Form 1040EZ when you receive a retirement distribution, even if the funds have been rolled over.  If you are moving money out of a pension, 401k, or any other qualified employer sponsored retirement plan, you enter the distribution amount in line 12a for Form 1040A or Line 16a for Form 1040.  If you are moving from one IRA to another, you would enter the distribution amount into Line 11a for Form 1040A or Line 15a for Form 1040.  Each of these entries has corresponding Line b “Taxable amount”.  Here, you enter zero along with the word “Rollover”.

Tax preparation software will enter this information for you, and tax professionals are well aware of how to report a retirement account transfer.  The benefits of consolidating your retirement accounts are far too numerous to let the process keep you from doing so.  The majority of 401k plans can be transferred in one short phone call.  These transfers can take place in as little as a week.  The transfer is simplified even more when you understanding how to handle and prepare for completing your taxes.

Disclaimer:  The information provided is not intended to be legal or tax advice.  Every business situation is different, and IRS tax rules change annually.  Consult with you tax and legal advisors before making any business decisions. Phoenician Financial Planning, LLC offers tax planning consultation services.

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