Key Takeaways
- If you received a distribution of $10 or more from your retirement plan, you should receive a copy of Form 1099-R, Form CSA 1099R, Form CSF 1099R, or Form RRB-1099-R.
- Pre-tax contributions to pension and annuity accounts generally are included in taxable income when distributed. If after-tax contributions were made to an annuity or pension, usually only a portion of the distribution would be taxed.
- If you transfer retirement funds directly from one custodian to another, you typically won’t pay taxes on the money transferred.
- If you take possession of the retirement funds before rolling them over, you’ll have 60 days to roll them over into a qualified account to avoid taxes and penalties.
Form 1099-R
Form 1099-R is used to report the distribution of retirement benefits such as pensions, annuities or other retirement plans. Additional variations of Form 1099-R include:
- Form CSA 1099R
- Form CSF 1099R
- Form RRB-1099-R
Most public and private pension plans that aren't 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.
Pension and annuity payments
Employer-based 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most retirement plan contributions are deferred, meaning that income tax isn't paid on contributed funds until they are withdrawn by the taxpayer.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 will usually be taxed.
TurboTax Tip:
If you take a loan against your pension plan and repay the loan with interest, the loan isn't considered to be a distribution in most cases. However, a Form 1099-R will be issued if you don't make the required loan payments on time.
Rollovers
A direct transfer moves retirement funds from one custodian to another, typically without paying taxes on the money transferred.
- Direct transfers are typically 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.
To avoid the funds being taxed as income and possible early distribution penalties, typically the funds must be rolled over into a qualified account within 60 days of distribution. Generally, you are only allowed to do one indirect rollover in a 12-month period regardless of how many IRA-type accounts that you have.
Funds distributed directly to the taxpayer are generally subject to a 20% federal income tax withholding. This means that the taxpayer must contribute additional funds to make up for the 20% that was withheld and sent to the IRS so that the rollover amount is equal to the total distribution. When a rollover meets all of the Internal Revenue Service guidelines, the distribution isn't taxed; however, the amount still must be reported on your tax return and shown as a rollover.
Loans
Some companies allow employees the option of taking loans against pension plans. Usually, these loans are repaid with interest and aren't considered to be distributions. Form 1099-R is issued when a taxpayer doesn't make the required loan payments on time.
- When this occurs, the amount not repaid is considered a distribution and is usually reported on Form 1099-R with the distribution code L.
- These distributions are deemed taxable income, and may be subject to early distribution penalties.
Early distributions
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% 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
- IRS levy
- medical expenses exceeding 7.5% of AGI
An exception is also met if the payments are made to an alternate payee under a qualified domestic relations (divorce) order.
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