Tax Reporting & Direct Rollover

by Leslie McClintock

The Internal Revenue Service allows owners of individual retirement accounts (IRAs) to roll tax-deferred retirement accounts directly from one investment company to another without incurring a tax liability. The same applies to tax-free retirement accounts -- you can roll a Roth IRA balance into another Roth IRA without incurring a tax liability.

Trustee-to-Trustee

The act of having one investment company roll a retirement account balance directly to an IRA account at another company is called a trustee-to-trustee transfer. The alternative is to have the old company send you a check, or wire you the money to you directly. However, it is then up to you to open the new IRA account and deposit the entire withdrawn balance within 60 days.

Reporting Requirements

When you transfer money out of a traditional IRA or 401k account, the old investment company will send you a Form 1099-R, with a copy furnished to the IRS. However, if you have rolled everything you withdrew into the new traditional IRA account, through a trustee-to-trustee transfer, you should still note the transfer on line 15a of your Form 1040, or line 11a for Form 1040A. Don't panic, because on Line 15b (Line 11b on the Form 1040A), you note how much of that transfer is taxable. For properly executed rollovers to traditional IRAs, that number is normally zero.

Reporting of Transfers

If you transfer money from a traditional IRA, 401(k), 403(b), SIMPLE IRA or SEP into a Roth IRA, you will pay income taxes on the amount of money you transferred, at ordinary income rates. In many cases, however, it is worth getting the benefits of tax-free growth in the Roth IRA. Moving assets from tax-deferred retirement accounts into a Roth is called a conversion. You will receive a Form 1099-R from the old company, detailing the amount transferred, and your tax basis. If you have made no nondeductible IRA contributions, however, your tax basis in these accounts is normally zero. You must declare the transfer as ordinary taxable income, minus your cost basis arising from nondeductible IRA contributions - on Form 1040 or 1040A, your personal income tax return. The Form 1099-R you received will give you both the taxable and non-taxable amounts

Advantages of Trustee-to-Trustee Transfers

Generally, it is preferable to execute a trustee-to-trustee transfer on IRA assets because it reduces the chances of causing a delay in completing the transfer within 60 days. This would result in a state and local income tax liability, and a potential 10 percent early withdrawal penalty for those under age 59 1/2. Additionally, when you transfer assets from a 401(k) plan into an IRA, the 401(k) plan sponsor is required by law to withhold 20 percent of the balance to pay income tax. If you didn't want to pay the income tax and any penalties, you would have to come up with the additional 20 percent out of your own pocket.

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