The rollover of an individual retirement account must be reported on the tax return of its owner. Even if the rollover is a nontaxable event, IRA owners are still required to report the withdrawal on their personal income tax return.
How the IRA rollover is reported depends on several factors. If only a portion of a distribution is rolled over, the remaining portion may be taxable. The potential requirement for tax withholding depends on how the IRA funds are transferred during the rollover. Your age at the time of the rollover may also create an additional reporting requirement if all the funds are not rolled over.
Start with Form 1099-R
The trustee for the IRA that is rolled over must provide you with IRS Form 1099-R, summarizing the rollover. Form 1099-R provides the information needed to report the rollover. IRS Form 1040 contains an entry line specifically for IRA transactions. The designated line contains two entry boxes, one for the total distribution and the other for any taxable amount of the distribution.
If all of the funds are rolled over into another traditional IRA, the taxable amount is zero. If only a portion of the IRA withdrawal is rolled over, the portion not rolled over is entered in the designated entry box as taxable income.
Confirm any tax withholding
If you choose to receive physical receipt of the funds during the IRA rollover process, there is a mandatory 20 percent tax withholding requirement. IRA tax withholding is added to any other withheld taxes and entered on a designated line on Form 1040.
If taxes are withheld, an account owner must replace the withheld taxes with other available funds in order to roll over the full distribution. However, the mandatory withholding requirement is not applicable to direct transfers from one trustee to another trustee. Unless your intention is to keep part of the withdrawal for other uses, a direct transfer is the best option to avoid withholding.
Enter any applicable penalty
IRA distributions taken before the age of 59 1/2 are generally subject to a 10 percent early distribution penalty. However, withdrawals fully rolled over are exempt from the penalty. For account owners under age 59 1/2, the 10 percent penalty may apply to any distribution not rolled over. The penalty amount is entered on a designated line on Form 1040.
There are several exceptions to the penalty for early distributions not rolled over. Contact a tax services specialist such as Tax Specialists Of Northern Colorado LLC for more information on retirement account rollovers.