When to Use Tax Form 1099-R: Distributions From Pensions, Annuities, Retirement, etc.
Form 1099-R is used to report the distribution of retirement benefits such as pensions, annuities or other retirement plans. Variations of Form 1099-R include Form CSA 1099R, Form CSF 1099R and Form RRB-1099-R. Most public and private pension plans that are not part of the Civil Service system use the standard Form 1099-R. You should receive a copy of Form 1099-R, or some variation, if you received a distribution of $10 or more from your retirement plan.
Retirement benefits are basically an extension of compensation arranged by the employer and employee. Income taxes on most retirement plan contributions are deferred, meaning that income tax is not paid on contributed funds until they are withdrawn by the taxpayer.
Pension and annuity distributions are usually made to retired employees, disabled employees and in some cases to the beneficiary of a deceased employee. If no after-tax contributions were made to the pension plan before distribution, the entire amount is generally included in taxable income. However, in cases where after-tax contributions were made to an annuity or pension, only a portion of the distribution may be taxed.
A rollover moves retirement funds from one custodian to another typically without paying taxes on the money transferred. Direct rollovers are identified on Form 1099-R by using either the G or H distribution codes in box 7. Indirect rollovers occur when the owner of the account takes possession of the retirement funds and re-deposits them into another qualified retirement account. In order to avoid the funds being taxed as income and possible early distribution penalties, the funds must be rolled over into a qualified account within 60 days of distribution.
Funds distributed directly to the taxpayer are subject to a 20 percent federal income tax withholding. This means that the taxpayer must contribute additional funds in order to make up for the 20 percent that was withheld so that the rollover amount is equal to the total distribution. When a rollover meets all of the Internal Revenue Service guidelines, the distribution is not taxed; however, the amount still must be reported on your tax return.
Some companies allow employees the option of taking loans against pension plans. In most cases, these loans are repaid with interest and are not considered to be distributions. Form 1099-R is issued when a taxpayer does not make the required loan payments on time. When this occurs, the amount not repaid is considered and distribution is reported on Form 1099-R with the distribution code L. These distributions are deemed taxable income, and may be subject to early distribution penalties.
Most benefits that are paid before the taxpayer has reached the age of 59 1/2 are considered to be early distributions. An additional 10 percent federal tax is imposed on early distributions to discourage the misuse of retirement funds. Additionally, some states also impose a state penalty on these early distributions. The additional tax applies to the entire taxable amount of the distribution unless an exception applies.
Some common exceptions include: disability, death, an IRS levy on the plan, and medical expenses exceeding 7.5 percent of the taxpayer's adjusted gross income (AGI). An exception is also met if the payments are made to an alternate payee under a qualified domestic relations (divorce) order.