Tax Reporting Requirements for a Self-Directed Rollover IRA

by Cindy Quarters

An individual retirement account (IRA) is a type of savings account that provides a means for working people to save money for retirement. If it is self-directed it means that the account owner has control of what happens to the IRA. Since the money in an IRA, as well as other types of retirement savings accounts, is intended to be used after the account owner reaches a certain age, there are strict rules for using and reporting the funds in an IRA. Changes must be reported to the IRS for the year in which money was removed from any qualified retirement account.

Traditional IRAs

Many different kinds of IRAs fall under the heading of traditional IRAs, including those created through an employer and those that are self-directed. Some of these have employer funds added, and some do not, but all of them are funded with pre-tax dollars. This means that all of the money contained within any type of a traditional IRA contains money that has not yet been taxed. This ultimately affects reporting requirements. Traditional IRA funds are subject to both income tax and penalties, if applicable.

Roth IRAs

A Roth IRA is a special type of IRA. All contributions made to a Roth IRA are made after taxes. This means that all money placed in a Roth IRA is money that has already had the taxes paid on it. Funds that are removed from a Roth IRA upon retirement are not subject to income tax, and neither are any earnings created by those funds. Taking money out of a Roth IRA prior to reaching age 59 1/2 can still trigger significant tax penalties.

Rollover

No taxes are due on money that is rolled over from one qualified retirement savings plan to another. If the money that is rolled over is released to the account owner prior to being placed in a self-directed IRA or other qualified plan, the fund custodian is required to withhold 20 percent of the total for income taxes even though the money is being rolled over. If the owner is not 59 1/2 or older, an additional 10 percent is also withheld as a penalty for early withdrawal. To avoid any withholding, the money must be transferred directly from one fund to another.

Reporting Requirements

Any time money is moved from a retirement fund, it must be reported on that year’s tax return. If money was withheld at the time the transfer was made, the withholding will be returned to the owner provided he can prove the funds were placed in a self-directed IRA or other qualified retirement account within 60 days. Even if the funds were transferred directly from one trustee to another, the account owner is responsible for reporting the change to the IRS. A 1099-R will be provided to the account owner showing the amount of the rollover, the taxable amount and the reason for the distribution of funds. This information is reported to the IRS on either a Form 1040 or 1040A.