Reporting rollover from IRA to 401k on U.S. Taxes

May 11, 2009 11:30 AM

US Tax Filter: How do I report an asset transfer/rollover from an IRA into a 401k to the IRS so that we are not taxed for the amount? I know you are not my tax advisor.

I do the taxes for for myself and my husband. In 2007, he neglected to give me a tax form and I filed our taxes incorrectly as a result. The IRS just sent me a letter, and I have 3 weeks to figure this out and fill out a 1040x for that year. I would like to do this myself if at all possible.

My husband had a 401k from a previous job that he wanted to roll into the 401k at his current employer. The previous one never did very well and the current one was making money. In addition, it was a fairly small amount, just under $15,000, and we were afraid we would lose track of it throughout the years. By the time he was able to get to this, the previous company had been sold, and this 401k was converted to a simple IRA. In retrospect, I realize he should have left the money in this IRA, but the momentum was already there to get this into his current employer's plan. In 2007, he got a check from the administrators of the IRA, and wrote a check for the same amount to his current retirement plan. He had about an inch of paperwork related to this, and feeling overwhelmed, he asked his HR department if there was anything else he needed to do, they said "no" and he stuck it all in the file cabinet. Taking tax advice from his employer's HR department is not a good thing, no? Especially since they didn't know they were giving out tax advice?

We got a letter Friday from the IRS saying that this was income we neglected to report, and that we owe back taxes and penalties of almost $7000. Digging around in our files, I found a 1099-R from AIG, the previous admin of the IRA, showing a gross distribution of the entire amount on line 1, and that the entire amount is taxable, per line 2a. He found a Confirmation of Asset Transfer/Rollover from Vanguard, the admin of his current 401k, for that same amount. How should I have reported this? I am assuming that we would not owe taxes on this since 401k assets are taxable when they are cashed out far in the future. However, I can't find anything on the IRS site or anywhere else reputable about how to report this. Apparently we are the only people in the world who have ever cashed out an IRA and put the money into a 401k.

Ultimately, what I would like to do is file a 1040x the way I should have filed the 1040 in 2007, then appeal the notice from the IRS and use a copy of the 1040x as documentation as to why we don't owe the taxes.

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posted by anonymous to work & money (6 answers total)

I don't know the answer, but taxgirl answers questions and might be able to help shed some light on your options.
posted by Blazecock Pileon at 12:07 PM on May 11, 2009

I'm not sure if you're saying the account the money was transferred to was a Simple IRA or if the account transferred from was a Simple IRA. So try looking at IRS pub 590. I'm guessing you want page 74, but there's loads of other info in there.
posted by curlyelk at 12:08 PM on May 11, 2009

If I remember the rules correctly:

If the check was made out directly to you or your husband that is considered income as far as the IRS is concerned.

To bypass that, the check should have been written directly to the new custodian "For the Benefit of (your husband's name)".

I'm pretty sure it's in the regs somewhere, but I'd have to research that some more to find it.
posted by Zoyashka at 12:30 PM on May 11, 2009

I took a look at that publication, and it quickly gets very complicated. It doesn't like a 401(k) as one of the accounts you can transfer an IRA too. But then there's also something called a Rollover IRA, which you can use as a holding place for transfers.
posted by smackfu at 12:34 PM on May 11, 2009

It isn't clear whether the transfer from your IRA to the new 401(k) was a direct transfer or a rollover. A direct transfer can occur in two ways. First the money can go directly from one trustee to the other without you ever seeing it. In the second direct transfer, you will get a check from the first trustee but it is not made out in your name and you cannot cash it. It will say something like "To Vanguard for the benefit of Mr. Anonymous."

But you made it sound like your husband cashed the check and then wrote another check to Vanguard. If that is true, then you did not have a direct transfer but instead had a rollover. You should be able to tell for sure by looking at the 1099-R. If it was a direct transfer, then the 1099 should show the total value of your IRA in Box 1 and zero for income tax withheld in box 4. If it was a rollover, then 20% of the value in box 1 would show up in box 4 and the check he received would have deducted this amount from the gross in box 1. This is very important and you need to determine this first.

If it was a direct transfer with no withholding and you completed the transfer to the new trustee within 60 days, then you are golden. All you have to do is enter the gross amount on line 15a of your 1040 and put zero for the taxable amount on line 15b. You should attach a short explanation indicating that you rolled over the entire amount from your IRA to your 401(k). You owe no tax on the transfer.

If you have taxes withheld on 1099-R box 4, then you may have a more difficult situation. You withdrew the gross amount on box 1 but only got a check for that amount minus the 20% withholding in box 4. In order to avoid taxes and penalties you must deposit the entire gross amount in box 1 within 60 days of receipt, not just the 80% that you got in the check from the former trustee. If you don't transfer the entire gross amount, the 20% underpayment is consider a non-qualifying withdrawal and you will owe taxes and penalties on the early withdrawal. You can use the 20% withheld as part of the payment for taxes and penalties.
posted by JackFlash at 2:15 PM on May 11, 2009

Follow-up from the OP

JackFlash nailed it in paragraph three. His was definitely the best answer, but I appreciate everyone's.

I made an appointment with a CPA just before asking this question, but now I feel comfortable canceling it and handling this myself.

I guess when my husband was told repeatedly that we wouldn't owe taxes with this transaction, he interpreted it to mean we wouldn't have to report anything. He knows better now!

posted by jessamyn at 4:51 PM on May 11, 2009