Form 1099-R With Distribution Code 3 In The Box 7 Planning to Roll Over Your 401k?

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Planning to Roll Over Your 401k?

Have you ever had the pleasure of receiving an audit letter from the IRS? You walk back from your mailbox with the dreaded feeling that you may owe more in taxes than you originally thought. You slowly remember that you rolled your old 401k into an IRA last year, and wonder why you might owe money for this action. Understanding the communications sent from the custodians where the accounts are held and knowing which IRS forms you need, should help put this issue to bed.

Know Your IRS Numbers

Unfortunately, there is no rhyme or reason to help you remember the different IRS form codes. However, keeping the following two in mind will help you a lot if you encounter a situation like the one we described above. After you initiate the rollover of a former 401k or 403b, you should expect to receive a Form 1099R. This form is used to report distributions from IRAs whether they are taxable or not. The second form, Form 5498, you’ll need is not as well-known but just as important. The purpose of this form is to report rollover contributions made to your new IRA. These two forms work from opposite ends when there is a rollover, conversion or recharacterization. Be especially careful when checking this information if a transaction starts with one provider and ends with another.

For example, if you completed a direct trustee-to-trustee rollover from a Fidelity 401k to a Vanguard IRA you should receive a 1099R from Fidelity and a form 5498 from Vanguard. The Fidelity 1099R should show the total amount in box 1 and code G in box 7 for a direct rollover. The Vanguard 5498 must show the same amount as the box 2 Rollover contribution.

If you completed a rollover within 60 days, where you received a check from a trustee and then made the rollover contribution within that time frame you’ll want to make sure that form 5498 correctly reports the rollover in box 2. More it is likely that the trustee issuing the 1099R for the distribution will report a taxable transaction. You need to show the “rollover” on your tax return and the IRS will get form 5498 to back that up.

Tax Date May 31st?

The trustee who maintains your individual retirement accounts (IRAs) is required by the IRS to report contributions, required minimum distributions and the fair market value of the account by May 31. This date as It’s an odd time to receive a tax form since you’ve probably already filed your return. However, form 5498 reports contributions made to an IRA during the tax year as well as those made after December 31, but before April 15 for the previous tax year. Make sure the contributions match what you report on your tax return. If not, contact the trustee who sent the form 5498 and request a correction.

RMD is not WMD

Another place to make sure the information provided by the trustee matches your records is Required Minimum Distributions. There are some fairly complicated rules regarding RMDs, especially if the account is inherited, so it makes sense to double check the accuracy of form 5498.

Understanding how this form is used by the IRS can help keep your tax headaches to a minimum.

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