How to Report a 60 Day Rollover on Your Taxes

Rolling over an old 401(k) to an IRA or a 401(k) you have with your current employer is a smart financial move. Not only does it ensure you don’t lose track of your hard retirement savings, but it also helps you monitor your investment’s performance, keeping you on pace to hit your retirement goals. However, rolling over a tax-advantaged retirement account to another tax-advantaged retirement account can be tricky. Knowing how to report a rollover on your taxes can help you avoid making costly mistakes.

When you roll over a 401(k) to an IRA or another 401(k), you have two options: a direct rollover and an indirect rollover. A direct rollover is when your 401(k) plan’s administrator transfers over your 401(k) funds to your new account. An indirect rollover occurs when the plan’s administrator cuts you a check in your name, and you deposit the funds yourself. The IRS gives you 60 days to deposit the funds into an eligible retirement account before assessing your income tax and early withdrawal penalties.

To report a 60 day rollover on your taxes, your plan’s administrator will send you a 1099-R. In box 13 of the 1099-R is the date of payment or when the funds were withdrawn from the 401(k). That is the date the IRS uses to determine whether the funds were deposited within 60 days. You’ll need to notate when the funds made it into your new retirement account to prove to the IRS the funds were deposited within 60 days of the date of payment displayed on the 1099-R.

When it comes to retirement accounts and taxes, it’s best to consult a tax professional that specializes in retirement accounts. However, knowing the basics can help you navigate the process and avoid any problems.

401(k) rollover basics

When leaving an employer, it’s always best practice to take your 401(k) along with you. By taking care of it during your final days with the company, you’ll have easier access to the plan’s administrator. This way, you can facilitate the rollover in the most straightforward way possible.

There are two ways to roll over a 401(k) to an IRA or another employer’s 401(k) plan: direct rollovers and indirect rollovers.

With a direct rollover, the 401(k) plan’s administrator transfers the 401(k) funds to the new account through an ACH transfer. No one actually touches the money or a check, and it’s “directly” deposited to whatever account you choose. You simply need to supply your old plan with the information of your new account, and they take care of the rest.

Another method for direct rollovers is through the 401(k) plan cutting a check made out to your new plan’s custodian. Most IRAs and 401(k)s have instructions on making the check payable for proper depositing. First, you’ll need to consult your new plan for instructions on how to draft the check. Secondly, the old 401(k) plan will send you a check made out to your new plan, and you’ll need to mail that check to your new plan according to their instructions.

An indirect rollover occurs when your old 401(k) plan cuts you a check in your name. Typically, the plan will withhold 20% of the withdrawal amount for taxes which could cut into your compounding interest potential. You can then deposit some or all of the amount to your new retirement account. Depending on your new plan, you may need to deposit the check into your checking account and then transfer the funds from there.

What is the 60-day rule for 401(k) rollover?

The IRS doesn’t require taxes or impose penalties on rollovers made from one retirement account to another eligible retirement account. Because you’re immediately depositing the funds into a retirement account that is subject to the same guidelines as your 401(k), the IRS treats the rollover as if you never removed retirement funds at all.

With direct rollovers, nobody actually touches the funds. They are directly deposited to your new retirement account. Even when a 401(k) cuts a check made out to another retirement plan, the account holder can’t actually cash the check because it’s made out to the other retirement account institution.

However, with indirect rollovers, a check is made out in the account holder’s name. The IRS doesn’t tax and penalize the account right away. They allow 60 days to deposit the funds into an eligible retirement account in order to avoid any taxes and penalties.

How to properly report indirect rollovers on taxes

It can be tricky to avoid any complications when dealing with indirect rollover and filing your taxes correctly. With both direct and indirect rollovers, your 401(k) plan’s administrator will send you a 1099-R indicating you took money out of your retirement account. However, this doesn’t necessarily mean you owe taxes on the withdrawn amount.

On the 1099-R in box 13 is the date of payment. That is the date the IRS uses to determine whether the funds were deposited within 60 days. To properly document whether this was done within the timeframe, you’ll need to notate when the funds made it into your new retirement account. If you transfer the amount from your checking account to your IRA or new 401(k), you’ll need to make sure the deposit date is no more than 60 days after the payment date. If you mail a check to your new retirement account, the postmark date should suffice to avoid any penalties with the IRS. If you’re cutting it close, it’s best to request tracking information from the USPS to document when you mailed the check and when your new custodian received it.

If the 401(k) plan’s administrator withheld 20% for tax purposes, that money isn’t lost. If the funds are deposited within the 60 day period, that 20% becomes a tax credit for that tax year. Then, when you file your taxes the following year, your tax obligation will be reduced by the amount withheld. Box number 4 on the form will indicate how much in federal taxes were withheld. This will help lower how much you owe in taxes, given you rolled over your 401(k) funds properly.

It’s essential when dealing with retirement accounts and rolling over funds from one to another to avoid issues that can cause you to owe taxes and penalties. Consulting a professional beforehand will help ensure you’re handling and documenting everything properly. However, rolling over an old 401(k) to a new 401(k) or IRA is essential in keeping track of your retirement savings and making sure you’re on track to meet your retirement goals.