The average American switches jobs 9 times in their career. For those who have saved money in their employer’s 401k, there a few options when they leave. The most popular is called an IRA rollover. This is a process where the employee simply transfers their 401k savings to an individually owned retirement account called an IRA.
Sarah has switched jobs and rolled over her 401K retirement plan into an IRA within the 60-day rollover period. As tax season approaches, she discloses that information to her accountant as they prepare for the April 15 filing deadline.
What Could Possibly Go Wrong?
Critical Errors when filling out a 1040 Tax Form: An accountant could accidentally code your rollover as a distribution. This would result in MAJOR tax implications. If the rollover is included in Line 16 (which accounts for retirement and pension distributions) you would be taxed on your rollover which should not get taxed if filed correctly. For example, if the rollover was $100,000 and was coded as a withdrawal, you would be penalized 10% for an early withdrawal (if under age 59 ½ ) in addition to your ordinary income tax. Therefore, if your ordinary income tax is 30%, you would owe $40,000 in taxes!