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Author: mtariq One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Need claification Date: 3/28/2002 9:59 PM
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When I do a rollover of a company 401K to a self directed IRA, do I need to report this rollover to the IRS? I got the impression that I do but I don't understand why. Why does the IRS care if I did a rollover?
Same question with a traditional IRA that I've transferred from one broker to another... is this considered a rollover and does it need to be reported to the IRS?
Mariam
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34056 of 76418
Subject: Re: Need claification Date: 3/29/2002 6:24 AM
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Mariam asks:

When I do a rollover of a company 401K to a self directed IRA, do I need to report this rollover to the IRS? I got the impression that I do but I don't understand why. Why does the IRS care if I did a rollover?
Same question with a traditional IRA that I've transferred from one broker to another... is this considered a rollover and does it need to be reported to the IRS?


The IRS cares about these distributions because it is charged with collecting taxes due on any income not previously taxed. Transfers of funds from a qualified retirement plan (e.g., a 401(k)) to an IRA or from one IRA to another are considered distributions from those vehicles. As such, they are potentially taxable, so they must be reported to the IRS. Therefore, plan administrators and IRA providers will send you and the IRS a Form 1099R showing any removal of funds that occurred during the tax-year. You, in turn, report that distribution on your return; however, you also only report the taxable amount of the distribution for taxation purposes. That means you will exclude that amount from income when you have transferred the money to another plan or IRA. There are lines on your income tax-return to show all that.

Regards..Pixy



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Author: FlaBuckeye Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34057 of 76418
Subject: Re: Need claification Date: 3/29/2002 10:54 AM
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What would constitute "Income not previously taxed"?
Am I assuming that when doing a rollover from a company 401k to a self
directed ira (I just retired)I might have to pay taxes on the increased value above my and my employer's contributions?
Now ya got me frightened !

Jim

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34058 of 76418
Subject: Re: Need claification Date: 3/29/2002 11:17 AM
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Jim asks:

What would constitute "Income not previously taxed"?
Am I assuming that when doing a rollover from a company 401k to a self
directed ira (I just retired)I might have to pay taxes on the increased value above my and my employer's contributions?
Now ya got me frightened !


Any elective contributions you made to your 401(k) that caused your taxable income to be less than your gross wages, any contribution your employer made to the 401(k) on your behalf, and all earnings within the 401(k) represent money that has never been taxed. If that money is transferred to a traditional IRA, then it will stay untaxed until it is withdrawn from the IRA and used by you in retirement. Then and only then will it be taxed, and the taxes will be paid at the ordinary income tax rates in effect in the year of withdrawal.

Note that you will NOT pay income taxes during the rollover, only when you take and keep the money from the plan or the IRA. A word of caution is in order though. To avoid any complications in that regard, you must arrange for a direct transfer from the plan custodian to the IRA provider. If you elect to take the money yourself with the intention of rolling it to an IRA within 60 days of receipt, then by law the plan administrator must withhold 20% of the amount distributed from the plan. To make a complete rollover, you must then come up with the 20% withheld and add that to the check you send to the IRA. If you don't do that, then come tax time the 20% withheld will be considered a distribution to you. That means you will have to pay income tax on that missing 20% plus a 10% penalty if you're younger than age 55 in the year you left that job. A direct transfer between the plan and the IRA avoids that problem, and 100% of the money in the plan will go into the IRA. Both your plan administrator and the IRA custodian will guide you through the steps to arrange for a direct transfer, so just ask them what you need to do.

Regards..Pixy

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Author: jtr56 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34059 of 76418
Subject: Re: Need claification Date: 3/29/2002 11:23 AM
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Am I assuming that when doing a rollover from a company 401k to a self directed ira (I just retired)I might have to pay taxes on the increased value above my and my employer's contributions?
Now ya got me frightened !


No need to fear. You will receive a 1099R which will show the total amount "distributed". If there were after-tax contributions, you will receive a check for that amount. The remainder will be sent to your self-directed IRA. Since you've already paid tax on the after-tax money (if any), and the rest goes into the IRA, none of it will be taxable currently.

You put the total amount on the 1040 line for "total pensions and annuities", zero on the "taxable amount" line, and write "rollover" in the space between the lines (I think to the right of 15a and 16a -- don't have the form in front of me.

Cheers (and calm!)
jtr

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Author: jtr56 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34060 of 76418
Subject: Re: Need claification Date: 3/29/2002 11:26 AM
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Oops...I'm off on one point. As of 2002, you can also roll over the after-tax money. In 2001 and before, this was not allowed, and therefore a check for that amount was sent to the owner. The new law is better, in that it allows us to roll over the after-tax money, if any, thus giving us more to tax-defer.

hth
jtr

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Author: CABob Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34061 of 76418
Subject: Re: Need claification Date: 3/29/2002 12:37 PM
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Oops...I'm off on one point. As of 2002, you can also roll over the after-tax money. In 2001 and before, this was not allowed, and therefore a check for that amount was sent to the owner. The new law is better, in that it allows us to roll over the after-tax money, if any, thus giving us more to tax-defer.

hth
jtr


Just thinking about this.... Does that mean the funds would be taxed twice, once when it goes into the 401k and then again when it comes out of the IRA? Or when it comes out is it separately identified so that taxes are not due. If the latter (which I hope is the case) can one choose which money is comming out or does it come out in the appropriate ratio or by some set formula?

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34062 of 76418
Subject: Re: Need claification Date: 3/29/2002 1:03 PM
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CABob asks:

Does that mean the funds would be taxed twice, once when it goes into the 401k and then again when it comes out of the IRA? Or when it comes out is it separately identified so that taxes are not due. If the latter (which I hope is the case) can one choose which money is comming out or does it come out in the appropriate ratio or by some set formula?

It will not be taxed again when you start withdrawals from the IRA. Instead, a pro rata portion of every IRA withdrawal will come to you tax-free based on those after-tax contributions, and the rest of the withdrawal will be taxed. Basically, if you start withdrawals when you have $1,000 of previously taxed money in an IRA worth $10,000 when you start withdrawals, then 10% (or $1,000 divided by $10,000) of the withdrawal will be untaxed. So, if you took $1,000, then $900 would be taxed and $100 wouldn't be taxed. Next year you would only have $900 of untaxed money left, so that becomes the numerator and the next year's market value becomes the denominator to compute that year's untaxed part of the withdrawal. You will find the procedures for this method described in IRS Publication 590 (Individual Retirement Arrangements) available for download at http://www.irs.ustreas.gov/forms_pubs/pubs.html. All withdrawals and the computation would be reported on Form 8606 that you must file with the income tax return for the year of the withdrawal.

Regards..Pixy

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Author: CABob Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34063 of 76418
Subject: Re: Need claification Date: 3/29/2002 2:35 PM
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Thanks Pixy
That explanation makes sense and seems fair to me but knowing the IRS I wasn't sure that would be the way it operates.

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