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- How to Report the Rollover of a 401(k) to a Traditional IRA on a 1040
If you're looking to move your 401(k) plan money directly to your Roth IRA, you're in luck. The Internal Revenue Service specifically permits you to do just such a thing, since it's easier than first transferring it to a traditional IRA before converting it to a Roth IRA.
You can only convert from a 401(k) plan to a Roth IRA if you're 59 1/2 or older or if you've left your job. Certain distributions from your 401(k) plan are always ineligible, including required minimum distributions, hardship distributions, loans treated as distributions and returns of excess contributions. For example, you can't get around the 59 1/2 year old rule by taking a loan or hardship distribution and then rolling it into a Roth IRA.
Options for Moving
You can move money from your 401(k) to your Roth IRA with either a direct transfer or a rollover. With a rollover, you take a distribution from your 401(k) plan and then have 60 days to deposit it in your Roth IRA. In addition, you'll have money withheld from the withdrawal, so you need to make up for that with money from your savings. The direct transfer has your financial institution do all the work -- you simply tell them where to move the money and the entire amount is moved automatically.
Conversions from your 401(k) plan to your Roth IRA count as taxable income in the year of the transfer because you're moving money from a pre-tax account to an after-tax account. When you contributed the money to the 401(k) plan, it wasn't ever included in your taxable income. If the IRS let you move the money to a Roth IRA without counting it as income, you'd be able to take your qualified Roth IRA distributions without ever having paid taxes on the money. (ref 1, p. 61)
On your income taxes, report the total amount of the conversion to your Roth IRA on line 16a of Form 1040 or line 12a of Form 1040A. Then write the same amount minus any nondeductible 401(k) contributions you made -- which is usually $0 -- on line 16b of Form 1040 or line 12b of Form 1040A, and write "rollover" next to it. In 2010, the IRS had a special rule that allowed you to spread the conversion income over two years, but that option no longer exists. (ref 3)