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  • Writer's pictureSteve Coker, CFP

How to Report IRA Distributions on Your Tax Returns

It’s tax time and if you took a distribution from an IRA or retirement plan then you will likely be filling out new information on your tax return this year. Whether you use a tax preparer or file your own taxes, here are some quick tips to make sure everything goes smoothly with Uncle Sam.

First, if you’ve taken any type of distribution from your IRA or retirement plan, then you’ll be receiving a form 1099-R showing the amount of the distribution. You will need to show this form to your tax preparer just like you would a W-2 for wage income. Of course, if you have taken distributions from multiple retirement accounts, then look for a 1099-R from each financial institution. The 1099-R is an all-purpose form to notify the IRS of a retirement plan distribution, even if the distribution is non-taxable, so don’t be alarmed if you performed a non-taxable rollover and then receive a 1099-R. It is normal!

The taxable amount of the distribution will be shown in box 2, and it is a good idea to review that information to make sure it is consistent with your understanding of the transaction. For example, if you thought you were performing a non-taxable rollover and you see a taxable amount in box 2, then that is the time to flag the issue for your tax preparer, and contact the financial institution to get this corrected. On the other hand, if you were simply taking distributions from your IRA to provide for living expenses, then expect the full amount of the distribution to be taxable.

Next, make sure to flag any indirect rollovers for your tax preparer. What I mean by an indirect rollover is any distribution from an IRA where you took possession of the funds and then ‘rolled over’ or re-contributed any or all of that distribution to another plan or IRA. The amount rolled over is not taxable, but the original distribution for an indirect rollover will be coded as taxable on the 1099-R! It is up to you to inform your tax preparer (and the IRS) of the amount rolled over. Indirect rollovers are rare, but it is important to handle them correctly, so make sure you make note of the date and amount of the re-contribution.

Lastly, don’t miss the codes shown in Box 7. These little codes seem so unimportant, but they are in fact key to understanding how the distribution will be handled. Again, the form 1099-R is an all-purpose form for multiple types of distributions from retirement plans. The codes in Box 7 show you, your tax preparer and the IRS exactly what type of distribution occurred and how to handle the resulting tax. Once again, it is a good idea to review the coding to make sure that it is consistent with your understanding of the distribution. If the code doesn’t make sense to you, make sure to run it by your tax preparer.

Tax time is never fun, but taking the time to understand these key steps will help make sure that your retirement plan distributions are treated correctly on your tax return. As always, we are here to help.

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