As promised for this week’s post, we are going to review how to report a rollover of an IRA or other Qualified Plan into your self-directed 401K. While similar to the rollover with the IRA, it is a bit different.
REMEMBER, the most important aspect to remember with any self-directed 401K plan is that when the funds are rolled over into the account, the company which is hosting your master account is NOT your custodian or administrator. As a host account, the company (e.g., Schwab) is only allowing the account to be housed at the company; they do not serve and are not the custodian of your plan. Why? Because you are established as the Trustee of your new plan. As a result of your plan being self-directed, this company will not do any tax reporting to the IRS as they are not responsible for your plan. If you remember this very important aspect, you will be miles ahead in the reporting game.
So, how or what does does this rollover transaction look like? First, once you request the funds to be rolled over into your new self-directed 401K plan, it is very important that, if at all possible, the rollover check be made payable to the 401K plan and not to the participant (you). For example, if I was a sole proprietor and had the 401K account “hosted” at Schwab (example), the rollover check to fund the 401K plan should be made payable to Charles Schwab, Inc. fbo the John Park 401K PSP. If I was incorporated (which my company is) and had that master account at Schwab, the rollover check would be made payable to Charles Schwab, Inc. fbo the PGI Agency, Inc. 401K PSP. Of course, if you are wiring funds into the plan, the funds will and should go directly to the plan’s account.
But, keep in mind that when you do a rollover, your previous custodian (where the rollover funds were coming from) will most likely be submitting to you AND the IRS a 1099-R…hopefully coded as “G” which indicates a rollover. The 1099-R is telling the IRS that the funds were distributed from the first plan. So, it only makes sense that there has to be a balance to the 1099-R which advises the IRS that the distribution is not to be a taxable event as it is being rolled over into another Qualified Plan. But, since the new company (e.g., Schwab) is NOT the custodian or administrator of your 401K plan, the company will NOT be making any report to the IRS for the receipt of such funds. So, what is one to do?
When filing your annual tax return (Form 1040 as an example) in the year in which the rollover occurred, you will report the IRA or Qualified Plan rollover into the self-directed 401K on either line 15A or 16A on the 1040. This is acknowledging receipt of distributed funds from the first plan. Assuming that you had a 100% rollover (you did not keep any of the distributed funds), you would indicate on Lines 15B or 16B that none of the funds involved in the rollover were taxable to you.
However, even with reporting the rollover as required on Form 1040, does this prevent the IRS from questioning you further regarding the rollover? Of course not. But, you have done what you need to do and can certainly demonstrate that you executed a properly executed rollover and that you did not personally benefit. You may also wish to visit with your tax preparer on any additional reporting steps (e.g., letter of explanation) you can electively make.
This post is to assist those with any rollover situations involving (specifically) a self-directed 401K plan. As always, this post is only intended to be educational in nature. The information in this post should not be considered as, nor should it be interpreted to be tax or legal advice. At all times, you should consult with your tax or legal professional.