It is that lovely time of year that we all like to look forward too - Tax Season! You might have noticed something in your mailbox that is labeled with the words “Important Tax Information Enclosed.” If you are a new retiree who has already been taking distributions from your 401(K), IRA, or Pension, then you will be receiving a form that is new to you: Form 1099-R. This form, which is 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 the 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. Distributions to you are generally taxable if taken from a traditional IRA (Roth IRAs are tax exempt), and the 1099-R will show how much of the distribution you will need to include in your income. 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.
When you finish preparing your tax return, it is possible that there is a difference between the taxes withheld form your retirement plan distributions and the final taxes due. This is similar to withholding taxes from your paycheck. Throughout the year, taxes are estimated then withheld and compared with the final taxes due on your tax return. If you withheld too little, then there will be an amount due on your tax return, and if you withheld too much, then you will be eligible for a refund.
In the beginning, this may all seem overwhelming, but over time, the process for filing a tax return in retirement becomes familiar and easier than filing a tax return during your working years. If you tend to make consistent distributions of the same amount, it should be even easier to refine your withholding to ensure you owe little or nothing when filing.
If you would like to know more about the 1099-R, the IRS has more detailed instructions for recipients here, or simply give us a call. We would be happy to help!