When you roll over funds from one 401(k) plan to another, you generally don’t have to pay taxes on the transfer. This is because rollovers are considered tax-free exchanges. However, there are some exceptions to this rule. For example, if you take a loan from your 401(k) plan and then roll over the funds to another plan, you may have to pay taxes on the loan amount. Additionally, if you are under age 59½ and you take a withdrawal from your 401(k) plan before rolling over the funds, you may have to pay taxes and a 10% penalty on the withdrawal amount. It’s important to consult with a tax professional to determine if you need to report a 401(k) rollover on your taxes.
Types of 401k Rollovers
A 401k rollover is a tax-advantaged way to move money from one retirement account to another. There are two main types of 401k rollovers:
- Direct rollover: This is a direct transfer of funds from one retirement account to another. The funds are not taxed, and you will not receive a 1099-R form for the rollover.
- Indirect rollover: This is a two-step process. First, you withdraw the funds from your old retirement account. Then, you have 60 days to roll over the funds into a new retirement account. The funds are taxed when you withdraw them from your old account, but you can avoid paying taxes on the rollover if you deposit the funds into a new retirement account within 60 days.
If you do not roll over the funds within 60 days, you will be subject to income tax and a 10% early withdrawal penalty if you are under age 59½.
Direct rollovers are easier to complete and are less likely to result in taxes or penalties. However, indirect rollovers may be necessary if you want to move funds to a new type of retirement account, such as a Roth IRA.
Tax Implications of 401k Rollovers
When you roll over a 401k to another account, there are certain tax implications you need to be aware of. Here’s a breakdown of how rollovers are taxed:
- Traditional 401k Rollovers: When you roll over a traditional 401k to another traditional IRA or 401k, there are no immediate tax consequences. The money you roll over remains tax-deferred until you withdraw it in retirement. However, if you roll over a traditional 401k to a Roth IRA, any earnings on the money you roll over will be taxed as income when you withdraw them in retirement.
- Roth 401k Rollovers: When you roll over a Roth 401k to another Roth IRA or 401k, there are no immediate tax consequences. The money you roll over will remain tax-free in the new account. However, if you roll over a Roth 401k to a traditional IRA, the money you roll over will be subject to income tax when you withdraw it in retirement.
Table 1: Tax Implications of 401k Rollovers Type of Rollover Tax Consequences Traditional 401k to Traditional IRA or 401k No immediate tax consequences Traditional 401k to Roth IRA Earnings on rolled over money will be taxed as income in retirement Roth 401k to Roth IRA or 401k No immediate tax consequences Roth 401k to Traditional IRA Money rolled over will be subject to income tax in retirement Reporting 401k Rollovers on Tax Returns
A 401(k) rollover is a tax-advantaged way to move money from one retirement account to another. When you roll over money from one 401(k) to another, you do not have to pay taxes on the money.
- However, you must report the rollover on your tax return.
The IRS uses the information on your tax return to track your retirement savings. This information helps the IRS to determine if you are eligible for certain tax breaks, such as the saver’s credit.
There are two ways to report a 401(k) rollover on your tax return:
1.
You can report the rollover on Form 1040, line 16a.
2.
You can report the rollover on Form 8606, Nondeductible IRAs.
If you are reporting the rollover on Form 1040, you will need to enter the amount of the rollover in the space provided. You will also need to check the box next to “Rollover from prior year.”
If you are reporting the rollover on Form 8606, you will need to complete Part II of the form. You will need to enter the amount of the rollover in the space provided. You will also need to check the box next to “Rollover from prior year.”
Year
Contribution Limit
2023
$22,500 ($30,000 for those age 50 and older)
2022
$20,500 ($27,000 for those age 50 and older)
2021
$19,500 ($26,000 for those age 50 and older)
The IRS has a helpful publication that provides more information about reporting 401(k) rollovers on your tax return. You can find this publication at the IRS website.
Direct Rollover vs. Indirect Rollover
When rolling over your 401(k) to another account, you have two options: direct rollover or indirect rollover. The type of rollover you choose will affect how you report the transaction on your taxes.
Direct Rollover
In a direct rollover, the money from your old 401(k) is transferred directly to your new account. This can be done either electronically or by check. No money is distributed to you, so you do not have to report the transaction on your taxes.
Indirect Rollover
In an indirect rollover, you receive a distribution from your old 401(k) and then have 60 days to roll the money over to a new account. The distribution is considered taxable income, so you must report it on your taxes. However, you can avoid paying taxes on the distribution if you roll the money over within 60 days.
Reporting a Direct Rollover
- No tax reporting is required for a direct rollover.
Reporting an Indirect Rollover
- Report the distribution from your old 401(k) as income on your tax return.
- Include the amount of the distribution on line 15a of Form 1040.
- On line 15b, enter the amount of the distribution that you rolled over within 60 days.
Type of Rollover Tax Reporting Direct Rollover No tax reporting required Indirect Rollover Report distribution as income, but avoid tax on amount rolled over within 60 days Well, there you have it, folks! Now you know that rolling over your 401k is generally not a taxable event, but it’s always a good idea to double-check with a tax professional. Remember, saving for the future is a marathon, not a sprint. Stay on track and enjoy the fruits of your labor later. Thanks for trekking through this financial jargon with me. If you have any more burning questions, don’t be a stranger. Drop by again soon, and let’s keep the money talk going!