Will I have to pay taxes on an IRA rollover

by Mary Kay Foss, CPA

I had a traditional IRA and then got a job in which my employer offered a 401(k). So I took all of my money out of the IRA and, 20 days later, put it into the 401(k). My broker likely will report the withdrawal as a distribution. Will I have to pay taxes or a penalty on the withdrawal? How should I handle the situation when filing taxes?

You're entitled to do one IRA rollover per year per account, so you should not have any tax difficulties. You will receive a Form 1099R from the IRA custodian that will likely show that the IRA distribution was taxable. You report it on your return on line 15a and show a taxable amount of zero on line 15b. The IRS occasionally sends out letters expecting that the amount would be taxable. If that happens, you'll just need to show that it was deposited into the 401(k) plan. A monthly statement from that plan should suffice for that purpose, and it isn't even certain that IRS will ask. Just keep the paperwork that shows the transfer to the 401(k) for three years after you file your return, and everything should be fine.

Since there is not tax, there is no penalty. The Form 1099R you receive from the IRA custodian may have a code 1, which indicates that no exception to the penalty exists. But your timely deposit of the funds into the 401(k) makes the penalty go away.

Mary Kay Foss, CPA, is a director at Sweeney Kovar, LLP, in Danville. You can reach her at (925) 648-3660(925) 648-3660.

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