“I rolled over my 401(k) and now I got this 1099-R; what does THAT mean?”
If you changed jobs in 2009, you may have withdrawn money from your former employer’s 401(k) and rolled it over into an IRA. You might think that has no tax consequences – and if you understood what you were doing at the time, you might be right. But when that Form 1099-R comes in the mail, and you put it into your tax software, you might be in for a shock.
In the best of all worlds, you had the 401(k) administrator do a direct rollover to your IRA, and you never saw a check. If that’s the case, then the Form 1099-R will have a “G” in box 7. Your tax software should handle this automatically for you, if you are not visiting someone like me, that is :)
On the other hand, some people just get a check from the 401(k) administrator and deposit that check in the IRA, never giving the tax consequences a second thought until the 1099-R shows up the following year. There are two potential problems here:
1. For a rollover to be tax-free, it must be done within 60 days of the 401(k) distribution.
2. The 401(k) administrator is required to withhold 20% of a distribution for Federal taxes, but the rollover must be for the entire amount of the distribution, including the 20% withheld.
So if you deposited only the net of your distribution after the 20% withholding, you are going to have to pay tax on the 20% that was withheld, AND (if you are under age 59 1/2) you will probably be subject to a 10% penalty on that amount, unless you fit under one of the possible exceptions. If you decided to “borrow” the money for a while to pay bills, and then made an IRA deposit after 60 days had elasped, the entire distribution might be taxable and subject to penalty. (This is why you should talk to a tax advisor before you tap into your retirement accounts!)
IRS Publication 575 covers the tax consequences of pension and annuity income, which includes 401(k) plans, and IRS Publication 590 covers the tax consequences of IRAs. If you find yourself in this situation, I also strongly suggest that you get advice from a tax advisor in your area before you file your return – I’ve seen a lot of potentially costly mistakes on returns using TurboTax or H&R Block At Home because people don’t make the right entries for their 1099-Rs.