Steve Coker, CFP
1099-R Basics for Tax Time
It is tax time, and your mailbox is likely stuffed with envelopes with the words “Important Tax Information Enclosed” written on the front. In fact, if you are a new retiree and you have taken a distribution from your 401k, IRA, or pension, then you will be receiving a new form: Form 1099-R. This form, issued by the plan provider, details how much money has been rolled-over or distributed to you, how much of the distribution was taxable, and how much, if any, was withheld for taxes at the time of distribution.
You can think of a 1099-R as the retiree’s equivalent to the W-2 you received while you were working. If you use a tax preparer, simply make sure that you receive a 1099-R for any plan that had a rollover or distribution and provide the information to your tax preparer. If you prepare your own taxes using Turbo Tax or similar software, then you must indicate that you have had a rollover or distribution (or both) during the year.
Remember, rollovers are not taxable, but you will still need to show the rollover on your tax return. You will see the Gross Distribution in Box 1 and the Taxable amount in Box 2. For a rollover, you should expect to see the full amount of the rollover in Box 1, but don't let this worry you - it does not mean that amount is taxable.
Distributions made directly to you are generally taxable, and the 1099-R will show how much of the distribution you will need to include in your income in Box 2. When there is a taxable distribution, plans will normally require tax withholding at the time of the distribution, much like your employer is required to withhold estimated taxes from each paycheck. This withholding will be shown in box 4.
Some distributions, such as Qualified Charitable Distributions, will be shown as taxable in box 2a, but will be flagged with the “Taxable Amount Not Determined” in box 2b. Be careful not to miss this box. If this box is checked, then it is up to the tax preparer to determine home much of the distribution is taxable. If you have made a Qualified Charitable Distribution during the year, it is a good idea to highlight this to your tax preparer. Box 2b can be easy to miss!
Once you prepare your return, there may be a difference between the taxes withheld from your retirement plan distributions, and the final taxes due. Again, this is normal and is very similar to withholding from your paycheck. During the year estimated taxes are withheld and compared with the final taxes due on your tax return. If your estimated withholding was too low, there will be an amount due on your tax return. If your estimated withholding was high, then you are eligible for a refund.
At first, all of this may seem strange and new, but over time the process for filing a tax return in retirement is very similar, and often easier, than filing a tax return during your working years. Especially if the draws from your retirement plans are consistent, you should be able to refine your estimates and increase or decrease your estimated withholding so that your estimated withholding is very close to what is owed on your tax return. That makes filing the return a simple exercise that results in little or nothing due at filing.
If you would like to know more about the 1099-R, the IRS has more detailed instructions for recipients here: https://www.irs.gov/forms-pubs/about-form-1099