When to Use Tax Form 1099-R: Retirement Distributions
Form 1099-R is used to report the distribution of retirement benefits such as pensions, annuities or other retirement plans. Variants of Form 1099-R include:
- CSA Form 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 1099-R form. You should receive a copy of Form 1099-R, or a variant if you received a distribution of $ 10 or more from your pension plan.
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Pension and annuity payments
Pension benefits are essentially an extension of compensation arranged by the employer and the employee. Income taxes on most pension plan contributions are deferred, which means that income tax is not paid on funds contributed until they are withdrawn by the taxpayer.
Pensions and annuities distributions are generally made to retired employees, disabled employees and, in some cases, the beneficiary of a deceased employee.
- If no after-tax contribution has been made to the pre-distribution pension plan, the full amount is usually included in taxable income.
- However, in cases where after-tax contributions have been made to an annuity or pension, only a portion of the distribution will usually be taxed.
A rollover moves pension funds from one custodian to another, usually without paying taxes on the money transferred.
- Direct bearings are identified on Form 1099-R using distribution codes G or H in box 7.
- Indirect rollovers occur when the account owner takes possession of the retirement funds and deposits them back into another qualified retirement account.
In order to avoid funds being taxed as income and possible early distribution penalties, funds must generally be transferred to a qualified account within 60 days of distribution. Typically, you are only allowed to perform one indirect rollover in a 12 month period.
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 in order to compensate for the 20% that was withheld so that the amount of the rollover equals the total distribution. When a rollover meets all Internal Revenue Service guidelines, the distribution is not taxed; however, the amount must still be reported on your tax return.
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Some companies offer employees the option of taking out loans against pension plans. In most cases, these loans are repaid with interest and are not considered distributions. Form 1099-R is issued when a taxpayer fails to make the required loan payments on time.
- When this occurs, the outstanding amount is considered a distribution and is usually reported on Form 1099-R with the distribution code L.
- These distributions are considered taxable income and may be subject to early distribution penalties.
Most benefits paid before the taxpayer turns 59 1/2 are considered advance distributions. An additional federal tax of 10% is imposed on early distributions to discourage the misuse of pension funds. Additionally, some states also impose a state penalty on such early distributions.
The additional tax applies to the entire taxable amount of the distribution, with some exceptions. Some common exceptions include:
- an IRS direct debit, and
- medical expenses exceeding 10% of the adjusted gross income (AGI) of the taxpayer for 2019 and 2020. This percentage is 7.5% of the AGI for the 2017 and 2018 tax years.
- An exception is also encountered if payments are made to another beneficiary under a qualified family relations (divorce) order.