How to Roll Over Traditional IRA to 401(k) Without Tax Penalties

by Angela M. Wheeland

    Typically, taxpayers who take distributions from a retirement plan before they reach 59½ must pay a minimum 10 percent penalty on the early distribution to the Internal Revenue Service. If you decide that your traditional Individual Retirement Account, or IRA, is not meeting your needs, you can roll over the funds to another retirement account. The IRS allows you to transfer a traditional IRA to several types of accounts, including a 401(k), without paying the early withdrawal penalty.

    Step 1

    Check with the holder of your 401(k) to determine whether the plan allows you to roll over money from an IRA. Some employee-sponsored 401(k) plans only allow contributions from employee payroll withholdings.

    Step 2

    Request a total distribution of your traditional IRA using the required request forms from the financial institution that holds your IRA. Each institution has its own procedure, but you should be prepared to provide your personal information, account number and Social Security number. The financial institution will withhold 20 percent of your retirement funds for income taxes to ensure that you follow through with rolling over the money. For example, if you request a $10,000 distribution, you will only receive $8,000. The remaining $2,000 is sent to the IRS to cover the taxes.

    Step 3

    Redeposit the entire distribution amount from your traditional IRA into your 401(k) account within 60 days. Because the holder of your traditional IRA withheld 20 percent, you have to add funds from other sources to avoid paying penalties. For example, if the financial institution withheld $2,000 for taxes, you will have to deposit an additional $2,000. If you deposit only the $8,000, you will pay a penalty on the $2,000.

    Step 4

    Download Form 1040 or 1040A from the IRS website.

    Step 5

    Report the total distribution amount of your traditional IRA in the first field of the line labeled “IRA Distributions” on Form 1040 or 1040A. This line is located in the Income section on both forms. You can find the total distribution amount in Box 1 of the 1099-R you received from the financial institution that initially held your IRA. Using the previous example, this amount would be $10,000.

    Step 6

    Report the taxable amount in the second field of the line labeled “IRA Distributions.” If you added money to the deposit to cover the income taxes withheld, enter “0” in this field. If you did not add additional funds to cover the income taxes, you will owe a penalty.

    Step 7

    Write “Rollover” next to the taxable amount.

    Step 8

    Include the income taxes withheld from the rollover in the line labeled “Federal Income Tax Withheld” on Form 1040 or 1040A. This information is located in Box 4 on Form 1099-B. If you added additional funds to the deposit, you will receive the tax withholdings as a refund or the money will go toward your tax bill.

    Step 9

    Complete Form 1040 or 1040A and file the tax form and the 1099-B with the IRS by the tax deadline.

    Photo Credits

    • Jupiterimages/liquidlibrary/Getty Images

    About the Author

    Angela M. Wheeland specializes in topics related to taxation, technology, gaming and criminal law. She has contributed to several websites and serves as the lead content editor for a construction-related website. Wheeland holds an Associate of Arts in accounting and criminal justice. She has owned and operated her own income tax-preparation business since 2006.

    Zacks Investment Research

    is an A+ Rated BBB

    Accredited Business.