A distribution a taxpayer receives from a retirement plan or IRA can be rolled over into another retirement plan or IRA within 60 days of the date of distribution. By rolling over the retirement plan distribution, the taxpayer generally does not pay tax on any portion of the rollover amount until they later withdraw it from the new plan. However, the taxpayer must still report the distribution on their tax return.
Types of Rollovers
A distribution that can be rolled over is called an "eligible rollover distribution". Like all retirement plans or IRA distributions, rollover distributions are reported to the taxpayer on the Form 1099-R. Depending upon the manner in which the rollover occurs it can affect whether taxes are withheld from the distribution and how the taxable amount is reported on Form 1099-R.
Rollovers can occur in the following ways:
- Direct Rollover - A direct rollover is when the retirement plan administrator makes the payment directly to another retirement plan or IRA. No taxes are withheld from such a transfer and the taxable amount reported on Form 1099-R Box 2a should be zero. The distribution code in Box 7 should be G.
- Trustee to Trustee - A trustee to trustee transfer is when the financial institution holding the IRA sends the payment directly to another financial institution. As with a direct rollover, no taxes ae withheld, the amount in Box 2a is zero, and the distribution code in Box 7 is G.
- 60-day rollovers - A taxpayer can roll over some or all of a distribution to another plan as long as they do it within 60 days of receiving it. Taxes may or may not be withheld as indicated on the Form 1099-R they receive. The amount in Box 2a might be the same as in Box 1, or less than Box 1, or be blank with Box 2b "Taxable amount not determined" checked. In this instance, the taxpayer has to calculate the taxable amount, if any, to be reported in their tax return. The distribution code in Box 7 is likely to be either 1 (early distribution if under age 59-1/2 at the time of the distribution) or 7 (normal distribution).
To enter a rollover distribution into the individual tax return in TaxSlayer Pro, from the Main Menu of the return (Form 1040) select:
- IRA, Pension Distributions (1099R, RRB-1099-R) - Select New and if prompted indicate whether the payee on the 1099-R is the taxpayer or spouse.
- Enter the Payer EIN, Name and Address.
- Enter the amount of the gross distribution in Box 1.
- Enter in Box 2a the amount of the distribution that was not rolled over. If the entire distribution was rolled over, enter zero.
- Was All/Part of Distribution Rolled Over? - Because the amounts in Boxes 1 and 2a are different, you'll be asked this question. Answer YES and when prompted enter the amount rolled over.
- Enter the Distribution Code in Box 7. If the taxpayer is under age 59-1/2 and Box 2a is more than zero, you will be queried if any exception to the 10% early withdrawal penalty applies. If no exception applies, select option 2, Transfer 1099-R Box 2a to Form 5329, Part 1, Line 1.
- Enter any remaining information from the 1099-R, including tax withheld, if any, along with indicating if the distribution is from an IRA.
Note: This is a guide on entering a rollover of a retirement plan and IRA distribution into the TaxSlayer Pro program. This is not intended as tax advice.