We frequently receive questions about which tax forms are required for a tax return. Generally speaking, most 401(k) retirement savers do not have to report anything special for taxes. Unfortunately, making generalizations about taxes is a slippery slope. We know taxes are confusing, so we have outlined some common 401(k) scenarios and their tax implications:

1. You made contributions to your 401(k) account this past year. You took no withdrawals or loans.

This scenario is true for most people. If your interaction with your 401(k) account was just saving money, then you will not receive any special tax forms for your 401(k) account. Your contributions (which are synced with payroll) will appear on your Form W-2 in box 12. Code D is for your pre-tax contributions and Code AA is for your Roth contributions. Ta-da!

2. You quit your job or were terminated during the year.

If your employment status changed, there are several ways this could impact your tax return. Here are the most common situations for employees: 

You did not move or make any transactions in your 401(k) account once you were terminated.

• If this is the case, then your tax filing responsibility is like scenario 1) above. The information that is important for your tax filing is included in Box 12 of your Form W-2. For those readers with an old 401(k) account (like an account you haven’t touched in 5 years), you should not expect to receive a Form W-2 from your ex-employer or report anything for your current tax return.

You (or your employer) cashed out your 401(k) account.

• If this is the case, then you will receive a 1099-R form. Additionally, your employer would indicate your gross distribution in box 2a and withhold 20% of your cashed out balance for federal taxes.

3. You took a withdrawal from your 401(k) account.

As discussed above, if you took money out of your 401(k) account then you will receive a Form 1099-R. Typically, a 401(k) withdrawal triggers income tax and a 10% penalty for individuals younger than 59.5 years old. However, the 2020 CARES Act eliminated the 10% taxation of distributions related to adverse financial consequences caused by the coronavirus. 

4. You completed a 401(k) direct rollover.

If you rolled an old 401(k) account to your new 401(k) account, you should receive Form 1099-R. Because this is not a taxable event, the form will indicate that your gross distribution is not subject to taxes. This will appear in box 7 with a code G (pre-tax) or H (Roth) for a rollover.

If you rolled an old 401(k) account to an IRA, then you will receive a Form 5498 for proof that your dollars were moved. Again, your income tax for such transaction is $0 assuming the rollover was complete within 60 days.

5. You have been paying down a 401(k) loan.

If you contributed to a 401(k) account without any late-payments or defaulting, then you do not have anything special to report for your tax return. This is similar to scenario 1) above.

6. You defaulted on a 401(k) loan.

In this case, you will receive a Form 1099-R and pay income tax on the outstanding balance. Additionally, you will pay a 10% penalty (if applicable).

7. You retired.

If you retired this past year, congratulations! There is nothing for you to report on your income tax return unless you took money out of your 401(k) account, in which case your taxable distributions would be included on Form 1099-R and included in your taxable income.

8. You turned 72 in the previous year.

If you turned 72, you need to research the Required Minimum Distribution (RMD) rules.  For example, if you are 72 years old and still working then you don’t have to take a RMD (unless you are a >5% owner of the organization). These rules are important to understand because the financial penalties for missing a RMD are substantial. Lastly, the 2020 CARES Act waived RMD requirements for this past year.

Taxes are complex! Please reach out to our team if you have any questions about your 401(k) account and your taxes.

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