401(k) rollover to IRA: Tax implications and how to report a rollover

When you leave a job, a lot of changes come with it—including impacts to your retirement account. So, what happens to your 401(k) retirement plan after leaving a job?

One option is to roll over a 401(k) plan to an individual retirement account (IRA).

An IRA rollover is a way to move your old 401(k) retirement funds to another account, but there are tax implications to be aware of. Keep reading to learn how to roll over a 401(k) and report the taxable activity related to your retirement assets to the Internal Revenue Service (IRS).

Note: Sometimes people think of an IRA rollover as a transfer IRA, but IRA rollover is the IRS terminology.

What is a 401(k) rollover?

A 401(k) rollover is when you transfer the money from a previous employer-sponsored plan (such as a 401(k) account) into a personal Individual Retirement Account (IRA) you set up on your own.

Why might I want to rollover my 401(k) to an IRA?

There are a few reasons you may want to rollover your 401(k) instead of keeping with your old 401(k) plan provider. Here are some benefits of rolling over a 401(k).

1. Leaving your 401(k) with your former employer means you’re not able to add money to the account. By doing a rollover to an IRA, you’re able to continue to contribute to your retirement fund (provided you have earned income).
2. It gives you more control over your retirement savings as financial institutions that offer IRAs generally have a wider range of investment choices than employer plans do
3. Convenience and potentially saving money. Let’s say you’ve switched careers a few times. consolidating your 401(k)s into a single IRA account can help simplify financial management and retirement planning, as well as reduce plan administrative fees.

What are other options for my 401(k) when I leave a job?

Other options are to leave the funds in the current 401(k), roll it over to a new 401(k), or cash out. Each choice has different tax implications and financial pros and cons. Learn more about taxes on a 401(k) distribution.

Can you roll over 401(k) money to a Roth IRA?

People thinking of a 401(k) to IRA rollover are likely talking about a Traditional IRA since they have been around longer. In short, yes, this type of rollover is also possible. However, the tax implications are different. When you roll over money from a Traditional 401(k) to a Roth IRA, you must pay taxes on the converted amount. This is because contributions to a 401(k) are typically made with pre-tax dollars which is not allowed with Roth IRAs. However, if you’re rolling over a Roth 401(k) to a Roth IRA, you’d generally only need to pay taxes on any employer match, unless you move the employer match portion to a Traditional IRA. 

Can you roll an IRA over to a 401(k)?

Yes, you can roll over a traditional IRA (but not a Roth IRA) into the 401(k) account if your plan permits it. This is commonly referred to as a reverse rollover.

How to roll over 401(k) to IRA plans

To rollover 401(k) funds, there are two options: You can complete a 401(k) rollover to IRA through a direct rollover or indirect rollover.

Let’s walk through each way to roll a 401(k) to IRA:  

How to roll 401(k) into IRA with a direct IRA rollover

You must instruct the plan administrator to pay the rollover distribution directly to the trustee of the IRA., With this option, you’re less likely to face an early withdrawal penalty.

How to convert 401(k) to IRA with an indirect IRA rollover

You instruct the plan administrator to pay the distribution to you directly and not the final account. Taxes may be withheld from the distribution, so you’ll need to use other funds to rollover the full amount.

There are two big differences between the two types of rollovers:

1. The first is that the money you’ll receive in an indirect IRA rollover will be the distribution amount minus tax withholdings. For example, if your distribution is $10,000 and 20% is withheld, you’d get a check for $8,000. However, you would still need to deposit the full $10,000 into the IRA within 60 days to avoid taxes or possible penalties on the difference. In a direct rollover, the funds would move from one account directly into the other which would eliminate the need to make up the difference that was withheld in taxes.  
2. Additionally, it’s your responsibility to put all the money distributed from the 401(k), including the amount withheld, into the IRA within a 60-day period for an indirect rollover. With a direct rollover, the funds would move directly between accounts without you ever needing to take possession and responsibility of the funds.

Keep in mind though, that if you miss the 60-day window and are under age 59 ½, then you’ll likely pay a 10% early IRA distribution penalty unless an exception applies.

How to report the 401(k) rollover into IRA

Wondering how to report 401(k) rollover on tax returns? IRA rollover tax reporting depends on the rollover type. Let’s break it down step-by-step based on each category:

For direct IRA rollovers:

1. The 401(k) plan administrator will send you IRS Form 1099-R.
2. Check that the form is correctly labeled as a direct rollover.
3. Then, look for a few key items:
4. Box 1 (Gross Distribution): This is the total amount distributed from your old retirement account.
5. Box 2a (Taxable Amount): In the case of a direct rollover, this box should be left blank. If there’s an amount here, it could indicate that taxes were withheld from the distribution.
6. Box 7 (Distribution Code): The code “G” signifies a direct rollover. This is the code you’re looking for.
7. Next, you’ll transfer this info onto your individual tax return. For most people, you’ll use IRS Form 1040.
8. Line 5a (Pensions and annuities): Report the total distribution from Box 1 here.
9. Line 5b (Taxable amount): Since you’ve executed a direct rollover, leave it blank.
10. Line 5b: Write “rollover” next to line 5b.

For indirect IRA rollovers:

For indirect rollovers, where you received a distribution from your 401(k), 20% in federal taxes might have been withheld from that check.

1. The 401(k) plan administrator will send you Form 1099-R.
2. Use the values reported on your 1099-R on your personal tax return via Form 1040.
3. You must roll over the check amount and the 20% withheld within 60 days for the distribution to be tax-free. This applies even though you didn’t receive the 20%. If you do this, you might get most of the withheld amount back in a tax refund because you won’t pay the tax on the withdrawal.
4. Review Form 5498. This is an information form that provides details about the rollover and confirms to the IRS that the distribution was successfully rolled over.

IRA rollover FAQs

If you’re considering rolling over your 401(k) account, we’ve got you covered. Let’s dive into some frequently asked questions:

Why might I want to rollover my 401(k) to an IRA?

Rolling a 401(k) into an IRA offers more investment options. If you roll funds over into an IRA, you can contribute to the 401(k) after you leave a company.

What are other options for my 401(k) when I leave a job?

There are four options for your 401(k) when you leave a job. You can:

• Roll it into an IRA
• Roll it into a new 401(k)
• Leave it where it is
• Cash it out

Each option has different tax implications.

Is there a limit on the amount of money you can roll over from a 401(k) to an IRA?

There is no limit on how much money you can roll over from a 401(k) to an IRA. However, the financial institution you choose may have minimums for an account. That said, you may need to shop around if you have a smaller 401(k).

Can you roll over 401(k) assets to a Traditional IRA?

You can roll pre-tax 401(k) funds into a traditional IRA, but this may prevent you from rolling them back into an employer-sponsored retirement plan later.

What makes me eligible for a rollover?

In most cases, a qualifying event happens — like when you leave an employer. Other reasons include death or disability.

If you forgot to report a 401(k) rollover, should you file an amended return?

The 401(k) plan administrator should have sent a Form 1099-R reporting your rollover by the end of January the year after your rollover. If you didn’t receive it or accidentally forgot to report the IRA when you initially filed your tax return, you must amend your federal taxes and report your 401(k) rollover on a Form 1040X: Amended Return.

Get help reporting your 401(k) rollover to an IRA

Tackling taxes alone can be confusing, especially when dealing with 401(k) rollovers. Whether you choose to file with a tax pro or file with H&R Block Online, you can rest assured that we’ll get you the biggest refund possible.