Form 1099-R is one of those things that can be compared to feeling like you are being kicked while you’re down. At least that's how I tend to think of them. It is a tax form that reports that you were “paid” by a certain retirement plan, pension, maybe disability, or survivor benefits. You basically know that you owe something the second you look at the form. A Form 1099-R looks like this (slight variations depending on the institution that sent it):
Anytime you make a distribution greater than $10 (fancy word for withdrawal) from a 401k, 403b, IRA, profit-sharing plan, pension, annuity, disability from a life insurance policy, survivor benefit plans, etc, you should receive a Form 1099-R.So back to the feeling of being kicked while you’re down: If you are taking money out of your retirement account before retirement, you are likely in a really tough economic situation. Surprise, you still owe Uncle Sam!If you are disabled and receive some money for that, “you get a Form 1099-R” too (Oprah Winfrey voice).If you are retiring and you are ready to live on what is called, oh, a fixed income...you got it. Yes, literally you got a 1099r if you got money from your pension or 401k. The way I try to explain it though is to think of the fact that at the very least you got someTHING right? At least you received money during that difficult time and that’s why you are receiving a 1099 r.Still sucky, I know. Either way, the IRS absolutely does not care about what I feel, you are expected to file the form with your taxes and pay any taxes due on the money.
A few different scenarios or “life events” can trigger a Form 1099-R to be sent to you.
Retiring is the most common life event that would result in you receiving a distribution from your IRA, retirement plan, annuity, or pension plan. If you are still working part-time you may not start withdrawing from your retirement plan right away. The new Required Minimum Distribution age being pushed back to 72 also means you might not touch your retirement accounts for some time. However, many people choose to start collecting their funds right after they retire to replace their pre-retirement income. The reason you actually receive a 1099r in the first place is that for the most part, all of your retirement benefits have not been taxed. If you are lucky enough to have a pension, you have not paid taxes on that money. Any pension benefit would be fully taxable as ordinary income.If you contributed to a 401k, a profit-sharing plan, or an IRA, you most likely contributed to the pre-tax or “traditional” option.The only time you do not have to pay taxes on retirement income is when you contributed to the ROTH 401k option or your ROTH IRA. It is important to know that even if you always contributed to a ROTH option in your 401k if you had an employer match, that match balance is fully taxable. That is because your employer contributed the match and received a tax deduction, so you will have to pay that tax on the matching benefit when you start withdrawing from it. A distribution must be requested in most cases so you will likely know that you will pay taxes on the money when you fill out a distribution request form.There are a couple of unfortunate situations where you might not know why you are getting a Form 1099-R. If you become disabled, you might not fully understand where the benefit is coming from or if your loved one passed away and you were the beneficiary.
Oh boy, if you have ever requested a rollover from one qualified account to another qualified account you might understand this. A rollover from one qualified account (let’s say a 401k at your old job) to another qualified account (let’s say an IRA that you have with your advisor) is not a taxable “trigger event.” So a rollover 401k to IRA. Or rollover from TSPOr rollover from 403b to IRA None of those should be taxable rollovers according to rollover rules. HOWEVER,Some financial institutions do not allow rollover checks to go straight to another financial institution. They require you (the account holder) to physically receive the check in the mail and send it to the new financial institution yourself. That’s where things get a little tricky.Most people receive the check, they mail it off, no problem. Sometimes though, there is a delay for one reason or another. Mostly because people freak out that they have this huge check and they don’t have any guidance on what to do with it so they figure they are fine as long as they don’t cash it. Well, the 60 days rollover rule makes this a little bit difficult. The 60 days rollover rule is exactly as it sounds. If you physically took possession of a rollover check (or the financial institution sending the rollover check made the check out to you and not the new institution) you have 60 days to make that rollover (say a rollover 401k to IRA).Part of the 60 days rollover rule is that if you don’t rollover the check within those 60 days, the IRS basically treats those funds as if you withdrew them instead. Remember what I mentioned earlier about taxes? You would have to pay taxes on the balance and potentially a penalty if you are under 59 ½ years of age. More on that below. Although you normally have the choice to pay 20% of taxes (the financial institution withholds this amount to pay the taxes on your behalf) on a withdrawal, you of course would not have withheld any taxes when doing a rollover because your intention was not to keep the funds. It just happened by accident. All of that to say, please reach out to a professional if you don’t know what you are supposed to do with a rollover check.You don’t want to end up accidentally breaking the 60 days rollover rule and dealing with that mess. Most of the time, however, you will simply receive a Form 1099-R as a way to document your rollover and not as a taxable event.
We slightly touched on this earlier. If you are in a tough situation and you need to take an early withdrawal (you are under 59 1/2 ) from your retirement plan or your IRA, you will have to pay taxes on that withdrawal and a 10% penalty. A penalty is imposed because well, it is supposed to be a retirement account. “BUT PAM, IT IS MY MONEY”Listen, I hear ya, it’s hard to argue with that, but the rules are the rules. You are not supposed to touch your retirement account funds because otherwise, Social Security will be in worse shape. You will end up with less money than anticipated and we can’t afford that as a society, they say.Not my rule.Some states also have their own penalty on top of the federal 10% penalty. The taxes are based on your annual income (salary plus withdrawal amount) so it is not technically the 20% that is withheld. It could be lower or higher depending on your total income. You also have to pay state taxes if you live in a state that has taxes. If you don’t - I am jealous. Anyhow, an early withdrawal would cause you to receive a from 1099 r as well.
Another reason you might be getting a from 1099 r with the code L on it is that you, my friend, might have taken a loan out of your 401k and never repaid it. That would mean that you can go ahead and re-read the early withdrawal section because that is basically what happens when you don’t repay your 401k loans.What???? Yea. A 401k usually (a lot of them anyway) has a loan capability to help employees tap into their funds if something comes up and the money is needed. I personally don’t recommend people use them for this exact reason. You don't want to be unaware of the rules and then BAM! You receive a Form 1099-R in the mail!For the sake of explaining how a 401k loan can go very wrong, follow along with this example:You can end up taking a loan out to buy a car because yours broke down. Hypothetical (but oh so realistic) example. Then stuff hits the fan (Covid-19) and you are laid off. Now you have no job and no money to pay back the loan. Your loan has now been deemed a withdrawal. You are 45 years old and since you are not 59 ½ years old yet, you can call that an early withdrawal. Taxes plus penalty. That’s how it goes. Unless you qualify for an exemption like death, disability, or medical expenses above the AGI percentage threshold.
I know I just said disability could be an exemption to the tax rules but that is only within a retirement plan. If you are actually receiving permanent and total disability payments from an insurance company, you will also receive a Form 1099-R.The distribution may be taxable or it may not be taxable. It depends on who purchased the insurance product.If you purchased it for yourself with after-tax dollars but there was growth in the account, you would only pay taxes on the growth.
These are a lot less common but some of you have charitable gift annuities and the distribution from these annuities triggers a Form 1099-R from the charity that issues the annuity. You would be on the hook to pay taxes on a distribution depending on assets that you used for the donation. If you donated cash initially, your distribution might be part ordinary income and partly tax-free. If you donated appreciated stock held long-term, (over a year and a day) part of the appreciated value would be considered to be ordinary capital gains, some would be capital gains and some of it could be tax-free. A Form 1099-R can be expected either way.
This article covered exactly what a Form 1099-R is, why you received said Form 1099-R, and when else you can expect to receive it.We also covered 60 days rollover rules, the 401k early withdrawal tax, and 401k loan hardship rules. I hope you enjoyed reading this post!If you have any questions regarding Form 1099-R, please reach out to us hereWe are always happy to help.[author_info]Pamela Rodriguez CFP®[/author_info]