Posted by The TaxAdvocate Group, LLC

Understanding Tax Form 1099-R: Distributions From Pensions, Retirements, and Annuities

Understanding Tax Form 1099-R: Distributions From Pensions, Retirements, and Annuities

Many forms of retirement benefits like annuities and pensions are reported on Form 1099-R. As long as you get a $10 or more distribution on your retirement plan, you will get copies of Form 1099-R or its variation.


When Does Form 1099-R apply?

With form 1099-R, taxpayers can report distributions of pensions, retirement plans, and annuities. It comes in variations including:

  • Form CSF 1099R 

  • Form CSA 1099R,

  • Form RRB-1099-R.

Most private and public pension plans that do not belong to the Civil Service system employ Standard form 1099-R.


Pension and annuity payments

We can classify retirement payment as part of the compensation agreement between the employer and worker. Most retirement plans have their income taxes deferred, which means that you do not have to pay income tax on funds you contributed till the taxpayer withdraws it.

Only retired workers, disabled employees, and relatives (beneficiaries) of deceased workers in some instances qualifies for annuity distributions and pension plans.

As long as there is no after-tax contribution to the pension plan before distribution, all the funds will be classified as taxable income.

For situations when the after-tax contributions were made on a pension on the annuity, just a part of the distribution will be subjected to tax.


Rollovers

A rollover allows taxpayers to transfer retirement funds from a custodian to the other. This process removes the need to pay taxes on the funds transferred.

You can identify direct rollovers on Form 1099-R with either the H or G distribution codes made in box 7. 

Indirect rollovers also can be identified when the account owner possesses the retirement funds and redirects them to another qualified retirement account.

To prevent the taxing of the funds as income and penalties from early distributions, it is essential to roll over the funds to an account that is qualified within two months of the distribution. Generally, you can do a single indirect rollover in a year.

Funds that the taxpayers get will have a 20% federal income withholding tax. The implication of this is that there will be an additional contribution from the taxpayer to take care of the 20%, which was withheld. With this, the rollover amount will be the same as the total distribution. A rollover that meets the entire guideline set forth by the IRS will not be taxed. The distribution amount, however, must reflect on your tax return.

 

Loans

There are provisions from some companies for employees to take loans rather than pension plans. In many cases, these loans are paid back with interest and not classified as part of the distribution. If the taxpayer does not pay the loan back on time, he or she will be issued a Form 1099-R

In such situations, we classify the funds being owed as a distribution and will reflect on Form 1099-R having a distribution code L.

These distributions are classified as taxable income and are bound by early distribution penalties.


Early Distributions

We classify early distributions as all benefits the taxpayers get before they reach the age of 59 ½. In a bid to discourage the misuse of retirement funds from early distributions, there is a 10% federal income tax. Also, some states have a penalty on such early distributions.

The extra tax covers all the taxable amount of the distribution, except there is an exception. A few of the standard exceptions are disability, IRS levy, death, and medical expenses.

The medical expenses apply provided it exceeds more than 10% of the taxpayer’s AGI for 2020 and 2019. For the years 2018 and 2019, this value was 7.5%.


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