I'm a Tax Pro: If You Rolled Over a Retirement Account, Don't Skip This Step
Rolling over an old 401(k) or other retirement account can feel like simply moving money from point A to point B. But once the funds arrive, there are a few important boxes to check to prevent unexpected tax headaches.
For those pondering a rollover event, financial experts offer the following five steps to follow.
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1. Confirm the Money Landed in the Right Account
The first step is to verify that the rollover was completed exactly as intended.
“One option is to roll the funds into a 401(k) if the company allows for rollovers or into a rollover IRA — traditional or Roth,” said Dr. Jeffrey Goodrich, founder of JCG Private Wealth Management and a professor at UCLA.
This is particularly important because, according to Maura Madden, a certified financial planner (CFP) and founder of Maura Madden Financial Planning, “You are never allowed to roll money [tax-free] from a pretax account into a Roth account.”
The transfer of money from pretax to Roth is called a Roth conversion, she said, and is a taxable event.
2. Save Your Rollover Paperwork
Don't toss the confirmations and statements you received once the rollover is complete.
“[T]he transferee's 1099-R will report the total rollover amount," Goodrich said, "which the transferee can match against the previously saved rollover paperwork."
Create a folder, digital or otherwise, containing the distribution statement, rollover confirmation and receiving-account statement.
3. Check Your Form 1099-R Carefully
The next major checkpoint comes at tax time. Madden said the most important thing is to ensure “all transactions are processed and coded correctly to avoid an unexpected tax bill.”
A Form 1099-R reports the distribution from the old account, even when the money was successfully rolled over and isn't taxable. According to the IRS, a rollover is still reportable on the federal tax return even when no tax is due.
That form is sent by the company you moved money away from and is filed with your tax return. When you receive the Form 1099-R, Madden said to verify the code in box 7. Code G indicates a direct rollover from a qualified retirement account to a tax-deferred IRA. Code H indicates a direct rollover from a Roth account to a Roth IRA.
If something looks wrong on your form, don't simply assume the custodian or IRS will sort it out automatically — they always put the burden on the taxpayer to figure things out.
4. Don't Panic When Form 5498 Arrives Later
A taxpayer can receive a 1099-R showing a large retirement distribution months before receiving documentation showing that the money went into another retirement account.
Many people may worry that they will be taxed on the distribution amount, but Madden assured them otherwise.
“There is no need to be concerned," she said. "The 5498 is always received after April 15.”
5. Pay Extra Attention to a 60-Day Rollover
If you received the retirement money yourself rather than having it transferred directly between financial institutions, the stakes are higher. The IRS generally gives you 60 days after receiving an eligible distribution to deposit it into another eligible retirement account.
Rachel Richards, a certified public accountant (CPA) and head of tax at tax firm Gelt, said that rule can cause problems.
“What people don’t understand is that the 60-day timer starts the moment you receive the money, not when it’s deposited, and weekends, holidays and bank delays do not pause that timer,” she said.
For an eligible rollover distribution from an employer retirement plan paid directly to the participant, the plan generally must withhold 20% for federal income taxes, Madden said.
Fix Rollover Errors as Soon as You Find Them
If the paperwork doesn't match what happened, contact the custodian and/or a tax professional promptly rather than ignoring the discrepancy, Madden said.
“For example, if the receipt of a direct rollover is coded as a contribution rather than a rollover, this must be fixed so that the tax forms are correctly issued.”
However, an unfamiliar 1099-R code doesn't necessarily mean something went wrong. Madden said that an indirect rollover might be reported with a distribution code because the original custodian doesn't know whether the taxpayer then deposited the money into another retirement account.
Always Confirm
Always confirm that a retirement rollover reached the intended account, keep your documentation, review your 1099-R and make sure the transaction is properly reflected on your tax return.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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