Saving for retirement is a long-term endeavor. It takes years to accumulate the funds necessary to generate enough income to cover your needs after you leave the workforce. During that time, you may change jobs several times, so it’s important to know how to rollover a 401k. Part of that process is properly reporting the rollover on your tax return.
A direct rollover to your new employer’s 401(k) plan will not create a tax liability, but it still needs to be reported. The same rules apply for a direct rollover to a traditional IRA. A Roth conversion is different. You’ll be converting tax-deferred contributions into after-tax savings. Indirect rollovers have their own set of rules. We’ll cover each of these scenarios below.
Direct rollovers to a new 401(k) plan
You should receive a form 1099-R when you do a direct rollover from your old employer’s 401(k) plan to your new employer’s. The amount in Box 1 of that form should be entered on line 5a of your 1040 (Pensions and Annuities). You’ll then enter “0” on line 5b (Taxable Amount) because there’s no tax liability on a direct rollover. It’s not counted as new income.
Direct rollovers from a 401(k) to a traditional IRA
The same rules apply for a direct rollover to a traditional IRA, so you’ll enter the rollover amount on your form 1040 with $0 taxable. The only real IRS change that happens when you convert to an IRA is that your maximum annual contribution level goes down. In 2023, you can contribute up to $6,500, not counting the rollover. That number goes to $7,500 if you’re over age 50.
Tax liabilities for Roth conversions
Roth conversions are a different animal. Contributions to a Roth IRA are made after taxes. Contributions to a 401(k) are tax-deferred, so you’ll need to pay income taxes on those funds when you do a Roth conversion. Reporting that is simple. Enter the amount from Box 1 of your 1099-R into both line 5a and line 5b of your 1040, signifying that the entire amount is taxable.
Indirect rollovers to 401(k)s or IRAs
An indirect rollover happens when you receive a check for the 401(k) plan you held with your old employer. The IRS gives you sixty days to deposit that check, but the plan administrator may withhold 20% for taxes. You can add that 20% back on your own to make the rollover tax-free or enter the amount of the withholding on line 5b and line 25b (Payments: Forms 1099).
IRS requirements and penalties on rollovers
You’re required to rollover your 401(k) plan within 60 days of leaving a job, or the funds in that account will be taxed as income. You’ll also pay a 10% early withdrawal penalty on that money if you’re under 59 ½ years old. That penalty applies to the taxes withheld on an indirect rollover if you don’t replenish them. You should get most of the withholding back when you file taxes.
The Bottom Line
The simplest option for rolling over a 401(k) is a direct rollover to another 401(k) or a traditional IRA. That type of rollover is recorded on line 5a of your form 1040 with a taxable amount of “0” on line 5b. With a Roth conversion, that taxable amount will be the entire amount of the rollover. With indirect rollovers, the taxable amount is the difference between your ending balance and how much you deposit into the new retirement account.