04 Aug Do you owe tax when moving a 401(k) to an IRA?

Q. When moving a 401(k) to an IRA, do you have to pay tax on the total withdrawn?
— Investor

A. We’re glad you asked. There’s often confusion about what retirement-related transactions are taxable.

What you are referring to would meet the definition of a tax-free rollover, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Holmdel.

He said there would be no tax incurred on the transfer of your 401(k) plan balance to an IRA.

You have two choices on how to execute the rollover.

You can arrange for the 401(k) plan assets to be transferred directly to your IRA, often referred to as a “trustee-to-trustee” transfer. Or, you can receive a distribution from the 401(k) plan and then transfer the funds to an IRA within 60 days of receiving the distribution, Becourtney said.

The tax-free rollover would apply for federal as well as New Jersey purposes, he said.

“Regardless of which method you choose to accomplish the rollover, you will receive a Form 1099-R the following January reporting the distribution from the 401(k) plan,” he said. “The gross distribution would be reported on your federal income tax return for the year of the rollover with zero portion of it taxable.”

Note these rules are for a rollover to a traditional IRA.

If you instead wanted to convert your 401(k) to a Roth IRA, there would be a taxable event.

“Taxable income will result from the value of the 401(k) plan on the date of conversion — the price that one must pay to achieve tax-free distributions in future years,” Becourtney said.

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This story was originally published on Aug. 4, 2020.

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