Money Matters

Transferring funds to IRA raises tax questions

February 9, 2013 

Q. I thought I did everything right when I rolled my 401(k) into an IRA, but yesterday I got a 1099-R in the mail.

Do I have to do anything with this for tax filing purposes? My tax situation is usually pretty simple, and in the past I’ve always filed a 1040-EZ. Can I still file the EZ form?

Don’t panic – yet. If you did a direct trustee-to-trustee transfer (as discussed in last week’s column), you shouldn’t owe any taxes. If you transferred to a Roth or you asked for a check (not payable to a trustee FBO you), you may owe taxes and perhaps a 10 percent penalty if you are under age 59-1/2.

On the 1099-R, if Box 2a shows that the taxable amount is zero, and in Box 7 code G is entered, this indicates that you have done a trustee-to-trustee transfer. This information has been provided to the IRA via a copy of the 1099-R, so you should be fine. You may want to check with your IRA trustee and make sure everything is in order; he or she should have submitted form 5498 to the IRS on your behalf. This form contains information about your contributions, including rollover amounts.

If you received a check from your former employer payable to yourself and deposited it within 60 days to your rollover IRA, you may or may not owe any tax. If you didn’t do a direct trustee-to-trustee transfer, your former employee was required to withhold 20 percent for federal taxes. In Box 4 of the 1099-R, you will see the amount withheld. This amount must have been made up from other resources to avoid the taxes.

If you did not do this and deposited the amount of your check, you will owe taxes on the amount withheld. Example: If the rollover amount was $10,000, your check would have been for $8,000. The amount you would have needed to deposit to avoid taxes would have been $10,000. You would have needed to front the $2,000 for the IRA deposit, and you wait to get it back as a tax refund. If you deposited only $8,000, the $2,000 will be subject to federal and state income tax. If you are under age 59-1/2, you also will owe a 10 percent early withdrawal penalty on the $2,000.

If you transferred the funds to a Roth IRA, the entire amount transferred will be taxable, but not subject to a 10 percent early withdrawal penalty if you’re under age 59-1/2.

This year, you should file either a 1040 or 1040A versus the 1040EZ. You’ll want to pay attention to line 16a (form 1040) or 12a (form 1040a). You’ll enter the taxable amount, if any, and write “rollover” on the dotted line next to this amount. You may wish to consult a tax professional to make sure the forms are completed properly.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624

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