Do I Need to Report a 401(k) Rollover on Taxes? – Avoid This Mistake + FAQs

Yes – in most cases you must report a 401(k) rollover on your tax return, even if it isn’t taxable.

The IRS considers a rollover a distribution and reinvestment that generally isn’t taxed (unless you rollover into a Roth), but it is reportable on your federal taxes.

Americans rolled over an estimated $595 billion from workplace retirement plans to IRAs in 2020 alone, highlighting how common these transactions are.

This article will explain when and how to report a 401(k) rollover on your taxes, covering federal rules, state tax nuances, types of rollovers (direct vs. indirect, Roth vs. traditional), detailed examples, common mistakes, IRS forms, deadlines, and more.

• Key Takeaways:
  • Direct 401(k) rollovers (trustee-to-trustee transfers) are not taxable but still need to be reported on your federal tax return. You’ll usually put the distribution on Form 1040 and mark it as a nontaxable rollover.
  • Indirect rollovers (60-day rollovers) require you to deposit the funds into a new retirement account within 60 days. They have a mandatory 20% withholding and you must roll over the full amount (including the withheld funds) to avoid taxes and penalties.
  • Rollover into a Roth (Roth conversion) is taxable. If you roll a traditional 401(k) into a Roth IRA, the full amount becomes taxable income in that year (though no early withdrawal penalty applies if done properly).
  • Most states follow federal tax rules for 401(k) rollovers (meaning no immediate state tax on a proper rollover). However, a few states (e.g., New Jersey) may treat a rollover as a taxable event at the state level, requiring special reporting.
  • Common mistakes – like missing the 60-day deadline, failing to report the rollover, or not redepositing the withheld 20% – can lead to unexpected taxes, penalties, or IRS notices. Careful adherence to IRS rules and timely reporting will help avoid these pitfalls.

Federal Rules: How 401(k) Rollovers Are Treated by the IRS

Under federal tax law, eligible 401(k) rollovers are generally tax-free but must be reported.

A 401(k) rollover means you take money out of a qualified retirement plan (like a 401(k)) and move it into another retirement account (such as an IRA or another employer’s 401(k)). As long as you follow the rules, the IRS does not count the rollover as taxable income in that year.

However, the IRS still requires you to report the distribution and rollover on your tax return to document that the funds went into another qualified account.

What does “reportable” mean? When you do a rollover, the plan administrator will issue a tax form (Form 1099-R) showing the distribution that left your 401(k). The IRS gets a copy of this form. Even if you moved the money to an IRA and owe no tax, you need to reflect that rollover on your Form 1040 so that the IRS can match it.

In practice, this typically means entering the distribution amount on your 1040, then indicating $0 as the taxable amount with a “Rollover” notation. By doing so, you let the IRS know the distribution was reinvested and not subject to tax.

Not all distributions qualify as rollovers. It’s important to note that most, but not all, 401(k) distributions can be rolled over. Federal law excludes certain payouts from rollover eligibility, such as required minimum distributions (RMDs), hardships, certain annuity payments, and defaulted loans.

Those must be taken as taxable income. But the typical lump-sum distribution you receive when changing jobs or retiring is an “eligible rollover distribution.” You have a window of 60 days from receiving such a distribution to complete a rollover to keep it tax-free. Next, we will look at the two main ways to execute a rollover – direct and indirect – and how each is handled for tax purposes.

Direct vs. Indirect Rollovers: Avoiding Taxes and Penalties

There are two primary ways to roll over a 401(k): directly or indirectly. The choice affects how the transaction is handled and how you report it. Here’s a breakdown:

1. Direct Rollover (Trustee-to-Trustee Transfer): This is the simplest and most IRS-friendly method. In a direct rollover, the funds move directly from your 401(k) plan to the new retirement account (an IRA or another employer’s plan) without you touching the money.

For example, your 401(k) plan might send a check payable to your IRA custodian (or send the money electronically). No taxes are withheld in a true direct rollover, and the entire amount moves into the new account.

• Tax treatment: A direct rollover is not a taxable event. The IRS considers it a continuation of your retirement savings, not a withdrawal. However, it is reported on tax forms. The 1099-R you receive will have a special code indicating a direct rollover to another plan.

• When you file your 1040, you’ll include the distribution on the line for pensions/IRA distributions, then show that it’s nontaxable. For instance, if you rolled over $50,000, you report “$50,000” on the appropriate line and “$0” on the taxable amount line, writing “Rollover” next to it. This tells the IRS the entire distribution was reinvested.

• Avoiding mistakes: Because no tax is withheld in a direct rollover, you don’t have to worry about coming up with extra cash. It’s straightforward: the full amount goes into the new account, and you’ve satisfied the rollover within one step.

• One common mistake people make is thinking a direct rollover doesn’t need to be reported at all – but it does. Always include the 1099-R information on your tax return (even though the taxable amount is zero) to avoid IRS letters about unreported income.

2. Indirect Rollover (60-Day Rollover): An indirect rollover means the 401(k) plan sends the money to you personally, and you then have up to 60 days to redeposit it into an IRA or other qualified plan.

For example, your plan might mail you a check for your balance when you leave a job. This method gives you temporary control of the funds, but it comes with strict rules and pitfalls.

• Mandatory 20% withholding: If you receive a distribution from a 401(k) in your name (not directly to another plan), the plan must withhold 20% for federal income tax by law. Let’s say you had $50,000 in your 401(k). You might get a check for $40,000, with $10,000 sent to the IRS as a withholding.

• Importantly, even though they withheld taxes, you can still complete a tax-free rollover, but you’ll need to take action: you must deposit the full $50,000 into the new IRA within 60 days, which means coming up with that missing $10,000 from other funds.

• The $10,000 withheld will be credited toward your taxes for the year, and you can get it back as a refund after filing, but only if you successfully roll over the entire eligible amount.

• Tax treatment: If you manage to roll over the full distribution (including replacing the withheld 20%), an indirect rollover is treated as non-taxable, just like a direct rollover. You will report the distribution on your 1040 and then show $0 taxable, indicating it was rolled over.

• However, if you fail to roll over the full amount, any portion not redeposited is taxable. For instance, if you received $40,000 and only rolled that amount into an IRA (not replacing the $10,000 withheld), that missing $10,000 is considered a distribution you kept. It will be taxed as income and, if you’re under 59½, hit with a 10% early withdrawal penalty as well.

• Common pitfalls: The indirect rollover route is fraught with possible mistakes. Missing the 60-day deadline is a big one – if you don’t get the money into an IRA within 60 days, the entire amount becomes a taxable distribution. Another frequent error is not realizing you need to replace the withheld money.

• Many taxpayers innocently roll over only the net amount they received, then get a surprise at tax time that they owe tax on the withheld portion. If you accidentally miss the deadline due to circumstances beyond your control (e.g. a postal error or serious illness), the IRS may grant a waiver or extension in some cases. But these are exceptions – it’s best to meet the 60-day rule to avoid needing any fixes.

Direct vs. Indirect Summary: Always aim for a direct rollover whenever possible. It simplifies reporting and avoids withholding complications.

Indirect rollovers can be done, but require careful handling and enough liquidity to cover any withheld amount temporarily. If done correctly, both methods result in no immediate tax. If done incorrectly, an indirect rollover can trigger unintended taxes and penalties that negate the benefit of the rollover.

Roth vs. Traditional Rollovers: Special Tax Implications

When considering rollovers, it’s crucial to distinguish between traditional (pre-tax) accounts and Roth (after-tax) accounts. The type of account you roll from and to determines whether the rollover will be tax-free or taxable.

Rolling Over a Traditional 401(k) to a Traditional IRA: This is the most common scenario. A traditional 401(k) holds pre-tax dollars – you haven’t paid tax on contributions or earnings. By rolling it into a traditional IRA (also pre-tax), you continue the tax-deferred status.

No tax is due at the time of rollover, as long as you complete the rollover properly. This can be done directly or indirectly (as discussed above). On your tax return, you report the distribution with $0 taxable income.

The IRS Form 1099-R will typically show the total amount in one box and a taxable amount of $0 (or indicate it’s a rollover via a specific code). This tells the IRS that the entire distribution was reinvested.

Rolling Over a Traditional 401(k) to a Roth IRA (Roth Conversion): This type of rollover is taxable because you’re moving funds from a pre-tax account to an after-tax account. A rollover from a traditional 401(k) directly into a Roth IRA is essentially a Roth conversion.

Since Roth accounts only contain post-tax money, you must pay taxes on the amount converted. For example, if you roll $20,000 from a traditional 401(k) to a Roth IRA, that $20,000 will be added to your taxable income for the year.

You’ll owe income tax on it just as if you earned it (but no 10% early withdrawal penalty, assuming the money goes straight into the Roth IRA without you taking possession). The 1099-R in this case will show $20,000 distributed, and $20,000 taxable.

On your 1040, you report the full amount as taxable rollover (often writing “Rollover to Roth” or simply letting the code on 1099-R indicate it). It’s crucial to plan for the tax bill – sometimes people do a large rollover to Roth and are surprised by the significant tax due in April.

• Why do a Roth conversion rollover? The benefit is that once in the Roth IRA, the money can grow tax-free and qualified withdrawals in retirement will be tax-free. It can be a smart move, especially if you anticipate being in a higher tax bracket later or you want to avoid required minimum distributions (RMDs, since Roth IRAs have no required minimum distributions for the original owner under current law).
• But you must be prepared to pay taxes now. Often, financial advisors suggest paying the conversion tax from other savings, not from the retirement funds themselves, to maximize how much stays invested. And remember, a Roth conversion from a 401(k) is irrevocable – once you do it in a given tax year, you can’t undo it later if the tax burden surprises you.

Rolling Over a Roth 401(k) to a Roth IRA: Many 401(k) plans offer a Roth option (designated Roth account) where you contributed after-tax dollars.

If you leave your job or choose to move that money, you can roll a Roth 401(k) into a Roth IRA. The good news: this rollover is tax-free. You’re staying in the after-tax Roth realm, so no new taxes are triggered. All your contributions were already taxed, and the earnings can continue to grow tax-free in the Roth IRA.

• Tax handling: You will get a Form 1099-R for the distribution from the Roth 401(k). It will show the total distributed, and it should also indicate the amount of basis (already taxed contributions) versus earnings.

• In a qualified rollover to a Roth IRA, usually the taxable amount on the 1099-R will be $0 (assuming the rollover is done properly). On your tax return, you still report the distribution, but none of it is taxable. Essentially it’s like moving one Roth pot to another. One nuance: If your Roth 401(k) was not yet qualified (e.g., you’re under 59½ or the account is less than 5 years old), rolling it to a Roth IRA is still not taxable now.

• However, the 5-year clock for Roth IRA qualified distributions may be affected. A Roth IRA has its own 5-year aging rule for tax-free withdrawals of earnings. If you never had a Roth IRA before, the rollover starts a new 5-year period for the Roth IRA (even if you had the Roth 401(k) for some time).

• This mostly matters if you plan to take money out of the Roth IRA in the near future. For most, it’s a non-issue, but it’s worth noting for completeness.

• Reporting tip: Similar to other rollovers, include the Roth 401(k) distribution on your 1040 (on the line for pensions/IRAs). The taxable amount will be zero. Because it’s a Roth, you might not need to write “Rollover” since any taxable amount would be zero anyway, but it’s wise to indicate rollover to avoid confusion. The IRS knows from the 1099-R code (often indicated by a specific code for a direct rollover of a designated Roth account) that it went to a Roth IRA. Keep records of your contribution basis as provided on Form 1099-R and by the plan, so your Roth IRA custodian can properly account for contributions versus earnings going forward.

Rolling Over a Traditional IRA into a 401(k) (Reverse Rollover): Although our focus is on 401(k) to IRA, note that the rollover can go the other way in some cases. If you have a traditional IRA, some employer plans allow you to roll those assets into the 401(k). For federal taxes, this is handled similarly: the IRA will issue a 1099-R for the distribution, and if you deposit it into the 401(k) plan within 60 days (or via direct transfer), it’s not taxable.

You’d report that on your return as a nontaxable rollover. One reason people do this is to consolidate accounts or to potentially shelter IRA funds in a 401(k) for better creditor protection or to enable certain Roth conversion strategies.

The key is that only pre-tax IRA money can go into a 401(k); any after-tax portion can’t be rolled into most plans. Always check that the employer plan accepts rollovers from IRAs, and execute it as a direct transfer when possible.

The table below summarizes common 401(k) rollover scenarios, their taxability, and how they’re reported:

State Tax Considerations: Could Your 401(k) Rollover Be Taxable Locally?

After handling federal taxes, you should also check how your state treats 401(k) rollovers. In most cases, if the rollover isn’t taxable federally, it’s not taxable on the state return either – but there are notable exceptions.

Most states conform to federal tax law on retirement distributions. This means if you report $0 taxable for a rollover on your federal return, your state (if it has income tax) will also treat it as $0 taxable. You usually just carry over the same distribution and taxable amount to the state form. States that start their tax calculation with the federal adjusted gross income will automatically exclude a properly executed rollover, since it wasn’t in the federal AGI.

However, a few states have quirks in their tax code regarding retirement plan rollovers:

• New Jersey: New Jersey is infamous for its unique treatment of retirement accounts. NJ does not allow a tax deduction for IRA contributions, and it historically treated some rollovers differently. As a result, a direct rollover from a 401(k) to an IRA can trigger New Jersey state income tax in the year of the rollover. In other words, NJ might treat it as if you withdrew the money (because the new IRA isn’t tax-deferred from NJ’s perspective if those contributions were never taxed before). For example, a NJ resident rolling over $50,000 from a 401(k) to an IRA could be required to report that $50,000 as New Jersey taxable income for that year.

• This is obviously a harsh outcome, essentially taxing your retirement savings decades earlier than expected. The logic (from NJ’s side) is that since you got an NJ tax break on the 401(k) contribution, moving it to an IRA (which they don’t tax-defer) means they want to tax it now. The good news is you wouldn’t be taxed again by NJ when you eventually withdraw it from the IRA (you’d get credit for previously taxed contributions).

• But it’s still a big upfront hit. Legislation has been discussed to change this rule, but as of this writing it remains an issue for NJ taxpayers. If you live in New Jersey, consider rolling a 401(k) into another employer plan (another 401(k) or 403(b) if possible) rather than an IRA, to avoid this problem. NJ generally respects 401(k)-to-401(k) rollovers as still within a qualified plan. Consult a NJ tax professional for the latest, because this is a nuanced area. (Note: NJ does allow you to exclude amounts that were already taxed by NJ. If you had after-tax contributions in the 401(k) or if some portion was previously taxed, you wouldn’t tax that again.)

• Pennsylvania: Pennsylvania also has some unusual rules. PA does not tax retirement income (like 401(k) or IRA withdrawals) if you’re above 59½ or meet certain retirement criteria. But for those who take distributions early, PA does tax them (since PA doesn’t follow federal penalty exceptions exactly). For rollovers, Pennsylvania, like NJ, didn’t allow deductions for 401(k) or IRA contributions historically.

• However, PA law generally does not tax rollovers if they are fiduciary-to-fiduciary transfers. If a rollover is done correctly, it should be fine. If mishandled (money paid to you), PA might consider it taxable unless put into a new account immediately. There’s anecdotal evidence PA might treat an IRA differently. One key difference: PA starts its income calculation independently of federal (it doesn’t use federal AGI).

• So you might have to explicitly exclude the rollover distribution on the PA return. Always check PA’s instructions or work with a CPA, because PA’s tax treatment on retirement income can be quirky.

• Other states: Most other states with an income tax follow the federal treatment for rollovers. A handful of states have no income tax at all (e.g., Florida, Texas), so there’s no state filing issue. Some states exempt retirement income or a portion of it for older taxpayers – a rollover isn’t income so it doesn’t need an exemption, but just know your eventual distributions might have state benefits.

• One state-specific nuance: Massachusetts doesn’t tax most retirement contributions going in, but does tax traditional IRA contributions (since MA decouples on IRA deductions).

• A direct rollover from a 401(k) to an IRA in MA should not be taxed at rollover; however, when you withdraw from that IRA in retirement, Massachusetts will only tax the portion that was never taxed before (similar concept to NJ, but they handle it at withdrawal time by tracking basis). Michigan and some others have special rules for pensions versus IRA distributions for older folks, but a rollover itself isn’t taxed – they focus on when you start drawing the money.

Key takeaway: Always check your state’s tax instructions for pension/annuity income. Look for any mention of rollovers. In many state tax booklets, there is a line like “Do not include rollovers that qualify for federal tax-free treatment” – which means you’re in the clear.

If you see something suggesting you need to add back a rollover, that’s a flag that your state is an outlier (as NJ is). When in doubt, consult a tax advisor in your state, especially if you live in states like New Jersey or Pennsylvania where the rules diverge from federal norms.

Examples of 401(k) Rollover Reporting in Practice

Let’s illustrate with a few common examples to solidify how rollovers are handled:

• Example 1: Direct rollover, no tax due. Maria left her job and directly rolled over her $30,000 401(k) into a traditional IRA. The check was made out to “Fidelity Investments, FBO Maria’s IRA” and she never touched the money. Maria gets a 1099-R showing $30,000, with the direct rollover code, and a taxable amount of $0. On her 1040, she reports $30,000 on the appropriate line, $0 as taxable, and writes “Rollover.”

• Result: $0 added to her taxable income. The IRS sees the code and $0 taxable, matching up with the IRA’s Form 5498 showing a $30k rollover contribution. All is well – no tax, no penalty.

• Example 2: Indirect rollover with full recovery. Raj took a distribution check from his 401(k) for $50,000. The plan withheld $10,000 (20%). Raj deposited the $40,000 check into a new IRA immediately and luckily had $10,000 in savings which he also added to the IRA to make it a full $50,000 rollover. All done within 60 days. His 1099-R shows $50,000 gross, $10,000 withheld, with the appropriate distribution code. On Raj’s 1040, he enters $50,000 on the appropriate line. On the taxable line, he puts $0 and writes “Rollover.” He also claims the $10,000 as federal tax withheld (which will boost his refund). Because he rolled it all, he does not owe the 10% penalty – the form will indicate $0 subject to penalty.

• Result: Raj pays no tax or penalty on the $50,000. He will get the $10,000 back as a refund (assuming he didn’t have other taxes due). If Raj had failed to come up with the $10,000 extra and only rolled $40,000, then $10,000 would be taxable and penalized. In that scenario, he’d put $10,000 as taxable and owe $1,000 penalty.

• Example 3: Roth conversion rollover. Lisa has $20,000 in a traditional 401(k) from a prior job. She decides to roll it into her Roth IRA to consolidate accounts and get future tax-free growth. She does a direct rollover to the Roth IRA. The 1099-R shows $20,000 with the appropriate code and importantly $20,000 taxable. Lisa is fifty years old.

• On her 1040, she reports $20,000 as both the total distribution and the taxable amount. This $20,000 is now part of her taxable income for the year. Because it went to a Roth IRA, it’s exempt from the early withdrawal penalty – the appropriate form will claim the exception. She ends up owing, say, $4,400 in federal tax on that $20,000 (if she’s in a 22% bracket), but now the $20,000 sits in her Roth IRA and won’t be taxed again.

• Result: Lisa had a current-year tax cost, but achieved a conversion. She correctly reports it to avoid any IRS mismatch.

• Example 4: Rollover with a state twist. Assume John from Example 1 (direct $30,000 rollover) lives in New Jersey. Federally, everything was fine with $0 taxable. On his NJ state tax return, however, he finds that New Jersey wants him to include that $30,000 in state income.

• John, unpleasantly, must report the $30,000 and pay NJ state tax on it (which could be around $1,500+ depending on his bracket). When John eventually withdraws from his IRA in retirement, NJ will allow him to exclude that $30,000 (so he’s not double-taxed).

• Result: John pays state tax now on a rollover. If John moves to another state later, he’s effectively pre-paid tax on those funds to NJ. This example underscores checking state rules.

• Example 5: Forgotten to report rollover. Karen rolled over her 401(k) but used tax software and mistakenly didn’t enter the 1099-R because she thought “it wasn’t taxable.” The IRS gets her 1099-R showing a $100,000 distribution, but her 1040 doesn’t show it at all. What will happen?

• Likely, mid-year, Karen will receive an IRS notice suggesting she failed to report income. The notice might propose the full $100,000 as taxable (and add penalties/interest) because their system didn’t see the rollover noted.

• Karen will then have to respond, proving it was rolled over. This can be resolved by providing evidence of the rollover (and the IRS can verify via Form 5498), but it’s a hassle. It’s far easier to have just reported it correctly in the first place. If you realize you forgot a rollover after filing, you should file an amended return to report it properly, rather than wait for the IRS notice.

Common Mistakes and Pitfalls to Avoid

Rolling over a 401(k) is not overly complicated, but missteps happen. Here are common mistakes and how to avoid them:

• Failing to report the rollover on your tax return: Not reporting a rollover is a frequent error. Some assume “no tax, no need to report.” In reality, all retirement plan distributions get reported to the IRS. Always include the 1099-R info on your return, with the appropriate rollover indication. If you realize you omitted it, amend your return to avoid notices.

• Missing the 60-day deadline (for indirect rollovers): Procrastination or unexpected delays can cause you to miss the 60-day window. This turns an intended rollover into a fully taxable withdrawal in the IRS’s eyes. If you truly had a hardship or error (lost check, hospitalization, etc.), the IRS has a procedure to self-certify and fix a late rollover. But you must meet specific criteria. Easiest prevention: initiate your rollover promptly and opt for direct transfer when possible.

• Not rolling over the entire eligible amount: This typically involves the 20% withholding issue. People deposit only the net amount they received. The IRS treats the withheld portion as distributed (and thus taxable). Solution: use other funds to make up the difference, or prepare to owe tax on the shortfall. If you can’t afford to replace the withheld amount, consider that portion as a withdrawal and plan for the tax. Alternatively, do a partial direct rollover of most funds and only take what you need as cash intentionally.

• Rolling over an RMD or other ineligible distribution: If you inadvertently roll over money that wasn’t eligible (like an RMD, or after-tax amounts to an ineligible account), you could have an excess contribution in the new account. For instance, rolling an RMD into an IRA would mean that amount is now an excess IRA contribution subject to penalty if not corrected.

• The fix is to withdraw that money from the IRA (plus any earnings on it) as an “excess contribution removal.” It’s messy and usually taxable. Prevent this by separating RMDs from rollovers. If you’re of RMD age in a year of a rollover, take the RMD first, and roll the rest.

• Doing multiple 60-day rollovers from IRAs in one year: This is an IRA-specific rule but catches some folks unaware. If you have two IRAs and try to do back-to-back indirect rollovers, the second one will be disallowed if it’s within 12 months of the first. The IRS enforced this strictly after 2015 due to a court case.

• This doesn’t apply to 401(k) rollovers or direct transfers, but sometimes people roll from a 401(k) to an IRA, then change their mind and try to move the IRA to another IRA by withdrawing and redepositing – that second step could violate the rule if within a year. It’s best to only use direct trustee-to-trustee transfers for IRA-to-IRA moves more than once a year.

• Not considering the age 55 rule before rolling to an IRA: If you separated from your employer in or after the year you turned 55 (50 for certain public safety employees), distributions from that employer’s 401(k) can be taken without the 10% early penalty. This is a special rule for 401(k)/403(b) plans. If you roll that 401(k) into an IRA, you lose this particular early withdrawal advantage (since IRAs generally require age 59½ for penalty-free access, barring specific exceptions).

• So a mistake some make is immediately rolling a 401(k) to an IRA at age 55 or 56, then later needing funds and discovering they could have taken from the 401(k) penalty-free but now stuck with an IRA that would charge a penalty. Tip: If you might need to withdraw funds early under the age-55 rule, you might leave some money in the 401(k) rather than rolling all of it to an IRA.

• Losing track of after-tax contributions: If you have after-tax money in your 401(k) (not Roth, but traditional after-tax contributions), be careful in rollovers. You ideally want to roll after-tax contributions into a Roth IRA (tax-free) and the pre-tax portion to a traditional IRA, done via direct split rollover. The IRS allows this strategy.

• A mistake is rolling after-tax dollars into a traditional IRA – it’s not disastrous (you’d just have basis in the IRA), but you lose the chance to get that into a Roth where future earnings would be tax-free. Make sure the plan administrator knows if you have after-tax amounts and instruct them properly (many will send two checks if needed: one for after-tax to Roth, one for the rest to traditional).

• Forgetting state tax implications: In certain states like NJ, a rollover could trigger state tax. It’s easy to overlook because federal is fine. Don’t be caught by surprise – plan for any state tax or paperwork needed.

• Not seeking advice for complex situations: High-balance rollovers, rollovers as part of a larger tax strategy (like partial Roth conversions each year), or rolling over company stock (NUA strategy) are advanced topics. Mistakes there can be costly.

• When in doubt, consult a financial advisor or tax professional. For example, company stock in a 401(k) might benefit from Net Unrealized Appreciation (NUA) treatment (taxed at capital gains) if handled by taking it out instead of rolling to an IRA – if you roll it to an IRA, you lose NUA potential. Such nuances are beyond our scope here but illustrate that sometimes not rolling over everything could be intentional for tax benefit.

By being aware of these common mistakes, you can confidently navigate your rollover without hiccups.

Pros and Cons of Rolling Over a 401(k)

Rolling over a 401(k) to an IRA (or another plan) is a big decision that goes beyond just tax reporting. Here’s a look at the advantages and disadvantages of doing a rollover:

As you can see, the decision to roll over involves considering fees, investment options, legal protections, and tax implications. From a purely tax-reporting perspective, as long as you follow the rules, the rollover should be smooth and not generate a tax cost (except deliberate Roth conversions or odd state rules). Always weigh the pros and cons in your personal situation.

How to Report a 401(k) Rollover on Your Tax Return (Step-by-Step)

Now that we’ve covered the types of rollovers and their tax effects, let’s detail how you actually report a rollover on your tax forms. It’s important to do this correctly to avoid the IRS mistaking your rollover for a taxable distribution.

Step 1: Watch for Form 1099-R in January

After the end of the tax year in which you did the rollover, the plan that distributed your 401(k) money will send you IRS Form 1099-R (usually by the end of January). This form shows how much was distributed and has codes in Box 7 indicating the type of distribution. Common codes:

• A code for direct rollover to an IRA or another qualified plan (this is what you want to see for a trustee-to-trustee rollover).
• A code for direct rollover of a designated Roth account to a Roth IRA (used if you rolled over a Roth 401(k) to a Roth IRA).
• A code indicating early distribution, no known exception (under 59½ and no direct rollover). If you see this but you did roll it over, it might be because it was an indirect rollover or the plan didn’t know of the rollover at issuance. You’ll clarify on your return.
• A code indicating normal distribution (e.g., if you’re over 59½). Sometimes used along with the direct rollover code if you are older but did a rollover.
• A code indicating early distribution with exception (this could appear for a Roth conversion under age 59½, indicating the 10% penalty doesn’t apply).

Review your 1099-R for accuracy. For a direct rollover, Box 1 (Gross distribution) will have the full amount, Box 2a (Taxable amount) should be zero or blank (or say “Taxable amount not determined” with the rollover code indicating rollover).

If you rolled to a Roth, Box 2a will equal Box 1 (since it’s taxable). There’s also a checkbox for IRA/SEP/SIMPLE – note that a distribution from a 401(k) will not have that checked (since it’s not from an IRA), but if you moved it into an IRA, your IRA custodian will separately report the rollover on another form. More on that later.

Step 2: Enter the distribution on your Form 1040

On your IRS Form 1040 (tax return), there are lines for “IRA distributions” and “Pensions and annuities”. 401(k) distributions (including rollovers) are treated like pension/annuity income on the tax form. As of recent tax years, you would use the appropriate lines on the 1040. If it was a rollover, you will:

• Write the full amount of the distribution on the appropriate line.
• On the taxable line, write the taxable amount. In a full rollover of a traditional account, this will be 0. In a Roth conversion or partial rollover, put the taxable portion (e.g., the part not rolled or converted).
• Next to that line, the form instructions say to write “Rollover” to clarify why it’s not taxable. (If e-filing, your tax software will usually have a checkbox or question to designate the distribution as a rollover, and it will handle marking it accordingly on the electronic form).

For example, John took a $100,000 distribution from his 401(k) when he changed jobs in 2024 and directly rolled it into an IRA. His 1099-R shows $100,000 in Box 1, $0 in Box 2a, with the direct rollover code in Box 7.

On his 1040, John enters $100,000 on the appropriate line, $0 on the taxable amount line, and writes “Rollover.” This tells the IRS the entire $100,000 isn’t taxable because it went into another retirement account.

If instead John had an indirect rollover: say the 1099-R showed $100,000, and $20,000 was withheld. If John rolled over only $80,000, then $20,000 was not rolled. On his 1040, he’d put $100,000 on the appropriate line and $20,000 as taxable. He’d owe a 10% penalty on that $20,000 (if he’s under age 59½) unless he qualifies for an exception.

If John managed to roll over the full $100,000 (using other funds to cover the withheld $20,000), he’d report $0 taxable, same as a direct rollover. He’d also get credit for the $20,000 withholding on his tax return (that appears on the payments section, just like wage withholding – so he might get a refund).

Step 3: Include any taxes withheld and attach additional forms if needed

If your 401(k) plan withheld 20% (or any amount) for taxes from an indirect rollover distribution, remember to report that on your tax return as federal income tax withheld (it should be on your 1099-R Box 4). That withholding will count toward your overall tax payments for the year, just like withholding from a paycheck.

Many people who do indirect rollovers end up getting that money back as a refund, since their rollover made the distribution non-taxable (assuming they rolled it all). However, if you failed to roll it all over, some of that withholding will go toward the tax on the portion you kept.

If part of your rollover is taxable (or you took a cash distribution), and you are under age 59½, you’ll likely owe the 10% early withdrawal penalty on that taxable portion. That is calculated on a specific penalty form and ultimately shows up on your tax return.

For instance, in John’s example where he kept $20,000, he’d owe a $2,000 penalty, unless he qualifies for an exception (like if he separated from service at age 55 or older, which is an exception for 401(k)s). That exception only applies if you took the distribution; a rollover in itself isn’t a penalty situation unless it fails. So for a successful complete rollover, no penalty form is needed.

Step 4: File your return, and keep records of the rollover

Once your 1040 is properly filled out, there isn’t a separate form to file to prove your rollover. The combination of your 1099-R and your notation of “Rollover” with the appropriate taxable amount does the job.

It’s a good idea to keep documentation of when and where you moved the money (e.g., a confirmation from the IRA provider of the incoming rollover contribution). Also retain Form 5498, which we’ll discuss next, for your records.

Form 5498 – IRA Contribution Information: If you rolled into an IRA, the IRA custodian will later send Form 5498 (usually in May, since IRA contributions can be made up to April) to you and the IRS. Form 5498, Box 2 reports the amount of any rollover contributions you made to that IRA. For example, if John’s $100,000 went into a Vanguard IRA, Vanguard will file Form 5498 showing a rollover contribution of $100,000.

You do not need to attach or file Form 5498 with your tax return – it’s just for informational matching. The IRS uses 5498 and 1099-R to cross-verify that distributions were properly rolled over.

If there’s no 5498 (or receiving plan info) for a distribution, the IRS might check that you marked it as taxable. Generally, as a taxpayer, you don’t do anything with Form 5498 except keep it in your records in case of any questions.

Deadlines and timing considerations: Remember the 60-day rule – that’s not a tax filing deadline, but the window to complete an indirect rollover. If you’re doing an indirect rollover late in the year (say you receive the money in December), be careful: 60 days could cross into the next tax year.

That’s okay – you’ll still report the rollover on the tax return for the year you took the distribution.

For example, you get a distribution on December 15, 2024 and you roll it over on January 20, 2025 (within 60 days). On your 2024 tax return, you’d still report the distribution and rollover as if it all happened in 2024. The 1099-R will be dated 2024.

The fact you completed the rollover in 2025 (within the allowed window) means you treat it as a nontaxable 2024 rollover. It’s wise to keep proof of the deposit date in case of any issue.

Finally, ensure you meet any other IRS rules that can affect rollovers:

• The one-rollover-per-year rule for IRAs: This rule says you can only do one indirect IRA-to-IRA rollover in any 12-month period. It does NOT apply to 401(k) rollovers or direct transfers. For clarity: rolling a 401(k) to an IRA and then later rolling that IRA to another IRA via direct trustee transfer is fine (trustee-to-trustee transfers between IRAs don’t count toward the limit either).
• The rule is only if you take possession of IRA funds and roll them to another IRA. Just be cautious if you plan multiple moves; consult a tax advisor to avoid violating this rule, which would make additional rollovers taxable.
• RMDs cannot be rolled over. If you’re of RMD age (73 in 2023, gradually rising to 75 in future years due to recent law changes), you must take your required minimum distribution from the 401(k) before doing a rollover of the rest. RMDs are explicitly ineligible for rollover.
• Rolling one over by mistake is a problem – it would be treated as an excess contribution in the new account and you’d have to undo it. Typically, plans will segregate the RMD and give it to you (taxable) while rolling the remainder to an IRA. Just be aware if you are older and doing a rollover, separate your RMDs.

FAQ

• Q: Does a direct 401(k) rollover count as income?
  A: No. A properly executed direct rollover is not counted as taxable income on your return, but you still report the distribution with $0 taxable.

• Q: How do I report a 401(k) rollover on my tax return?
  A: Enter the distribution on Form 1040 (appropriate lines for pensions/IRA distributions) and enter the taxable amount (often $0 if fully rolled over). Write “Rollover” next to it to indicate it was reinvested.

• Q: Will I get a tax form for my rollover?
  A: Yes. You’ll receive Form 1099-R reporting the 401(k) distribution. If rolled into an IRA, you’ll also get Form 5498 from the IRA custodian showing the rollover contribution (for your records).

• Q: Are indirect (60-day) rollovers tax-free?
  A: They can be. If you redeposit the full amount (including any withheld taxes) into a new retirement account within 60 days, it’s tax-free. Any portion not rolled over becomes taxable (and penalized if under 59½).

• Q: Do I pay the 10% penalty on a rollover?
  A: Not if the money goes into another retirement account. The 10% early withdrawal penalty is waived for rollovers. But if you miss the 60-day deadline or keep some cash, that portion is penalized if no exception applies.

• Q: Are there limits on how many rollovers I can do?
  A: There’s no limit on direct rollovers from 401(k)s or on rolling a 401(k) into an IRA. However, you can only do one indirect rollover per year for IRAs. Also, each 401(k) distribution can only be rolled over once.

• Q: Do states tax 401(k) rollovers?
  A: Most do not tax rollovers if they’re tax-free federally. A few (like New Jersey) may tax a rollover at the state level. Check your state’s rules to be sure.

• Q: What happens if I accidentally don’t report a rollover?
  A: The IRS may assume it was a taxable distribution and send you a notice proposing tax. It’s best to file an amended return to report it properly and show it was a rollover, avoiding penalties.

• Q: Which IRS forms should I be aware of for a rollover?
  A: Form 1099-R (reports the payout), Form 5498 (reports IRA rollover receipt), Form 1040 for reporting, and possibly Form 5329 if any portion is subject to penalty.

• Q: Can I roll over a 401(k) to a new employer’s 401(k) instead of an IRA?
  A: Yes, if the new plan accepts rollovers. The tax reporting is similar – it’s still a non-taxable rollover. Just report the 1099-R as a rollover on your 1040. The new plan will handle the incoming funds.