Retirement Plan Rollovers

When changing jobs, it is usually to your advantage to take your 401(k) plan with you. In this process, you transfer it directly from your old workplace to your new company's plan, never touching the cash yourself.  This is a smart move because not only did you maintain your retirement fund's consistent earnings, you also helped minimize tax consequences.

Keep in mind that when you do this, you will still get a Form 1099-R that notes a copy has gone to the Internal Revenue Service.  This is done to enable the IRS to keep track of any so-called trustee-to-trustee transfers that you make with tax-deferred retirement accounts. The key here is reporting the amount moved and the amount that's taxable. With direct rollovers, these are two dramatically different figures. The 1099-R you received will help you differentiate -- and properly report -- these amounts.

What the 1099-R tells you

Box 1 of the form shows the total amount of your retirement fund that was distributed.  Box 2a will tell you the taxable amount.  For direct rollovers from one qualified plan to another, that amount generally is zero.

Also check box 7, the distribution code. A letter or number should be here, explaining to the IRS exactly why your retirement money was taken out and just what was done with it. Direct rollovers to another qualified plan are coded with the letter G. This includes transfers to another company's 401(k) plan, a tax-sheltered 403(b) annuity, a government 457(b) plan or an IRA.  The code lets the IRS know that the money was never in your hands, an important point when it comes to taxes on transferred retirement funds. If you had taken the money out yourself, taxes would have been withheld.

What you tell the IRS

When you are sure that your retirement-plan transfer is reported correctly on your 1099, you must tell the IRS the same thing on your tax return. If you got a retirement distribution, you can't file a Form 1040EZ. You must file either a 1040A or 1040 return.

Your full company retirement-plan distribution goes on line 12a if you file form 1040A, on line 16a if you use the long form 1040. The taxable amount -- zero for direct rollovers since you are not taking out the money -- then goes on line 12b or 16b. Be sure to write "rollover" next to the amount.

The same process is used if you move IRA accounts, say to consolidate multiple accounts or get a better return on your retirement investment. For reporting purposes on your tax return, an IRA includes a traditional retirement account, a Roth IRA, a simplified employee pension (SEP) IRA or a savings incentive match plan for employees (SIMPLE) account.

You'll get a 1099-R for your IRA transfer and will report the transaction on lines 11a and 11b of the 1040A or 15a and 15b of the 1040. Again, write "rollover" on your tax return.

Don't touch the money

Because you transferred your retirement account from one plan manager to another, reporting the move to the IRS is simple. Trustee-to-trustee transfers, noted by the G code on the 1099-R, are generally non-taxable events. The money goes from one account manager to another, never in your hands to be viewed by the IRS as taxable income.

However, if you had opted to take the money yourself, 20 percent of your account would have been withheld. For example, if you had $10,000 in your 401(k), $2,000 was withheld when you took the distribution, meaning you actually got only $8,000.

The IRS gives you 60 days to redeposit your distribution into another retirement account and maintain tax-deferred status. But even if you do that, it will cost you upfront cash. To ensure that your entire account meets IRS regulations, you must come up with the withheld $2,000 from some other source to make your rollover contribution equal to the original $10,000 distribution. You'll get that $2,000 back when you file your taxes, either in cash or applied to other taxes you owe. In the meantime, however, you've given the IRS interest-free use of your $2,000.

If you directly transferred your pension money last year between trustees, you're in good tax shape. The details on Form 1099-R will help prove you continually maintained your account's tax-deferred status.

And if you move your retirement money this year, make sure it's a trustee-to-trustee transfer -- and look for that supporting 1099 next year.