You get Form 1099-R when you take money out of a retirement plan because many of those withdrawals are taxable. That doesn’t mean you owe taxes.
What is Tax Form 1099-R?
Form 1099-R is a tax form that reports distributions you received from pensions, IRAs, 401(k)s, and other retirement accounts. It’s similar to a W-2 from a job or a 1099-NEC from independent contractor work.
Form 1099-R has several key pieces of information including the amount you received and the federal income tax withheld. It also has distribution codes showing whether or not you had a qualifying reason for the withdrawal.
What federal income taxes apply to retirement account withdrawals?
You will normally owe federal income tax when you receive payments from a:
- Pension or other deferred income plan
- Traditional IRA
- Traditional 401(k)
- Other tax-deferred retirement accounts
Even if you’re withdrawing money in retirement, these are tax-deferred not tax-free accounts. That means you can exclude your contributions from your taxable income while you’re working but have to pay taxes on the money you withdraw when you retire.
Note: Some states with income taxes exempt retirement income from state taxes even when it’s subject to federal taxes.
If you withdraw money before age 59.5 without a qualifying reason, you will also usually owe a 10% penalty on top of the taxes. If the early withdrawal is from a Roth IRA or Roth 401(k), you will also owe income tax on the earnings that you withdraw.
What about backdoor Roth conversions?
Some people are surprised to get a 1099-R for backdoor Roth IRA conversions. Since a backdoor Roth conversion usually converts non-deductible IRA contributions, you usually expect to not be taxed on the conversion.
When you look at your 1099-R, you should usually see your conversion amount in Box 2a as “taxable amount not determined.” You (or your accountant) will determine the taxable amount when you file your tax return.
If your IRA only had non-deductible contributions and no earnings, you shouldn’t owe any taxes on the conversion. If you 1) did have deductible contributions in your IRA, or 2) earned interest income or had investment gains before doing the backdoor conversion, then part of your conversion probably will be taxable.
How do Form 1099-R distribution codes work?
One of the most important things on your Form 1099-R is Box 7: Distribution Code. That’s what tells the IRS whether you may owe penalties on a non-qualified distribution from your retirement account.
Some of the distribution codes that come up the most are:
- 1—Early distribution, no known exception (in most cases, under age 59 1⁄2).
- 2—Early distribution, exception applies (under age 591⁄2).
- J—Early distribution from a Roth IRA, no known exception (in most cases, under age 59 1⁄2).
- T—Roth IRA distribution, exception applies.
Why does my Form 1099-R say no exception when I have an exception?
The key to understanding your Form 1099-R distribution code is that it’s no known exception. That means that your retirement account provider has to know about your exception.
But retirement plans don’t just take your word for it. If they transfer your retirement funds directly to something that gives you an exception, they’ll enter the code for that exception.
If you get a check or direct deposit, your 1099-R will usually say no known exception. That’s OK.
When you file your taxes:
- Enter Form 1099-R in your tax filing software exactly as you received it. The software might show a penalty. That’s still OK.
- Next, your tax filing software will guide you through completing Form 5329. Form 5329 is how you tell the IRS you really did have an exception. (The software may tell you you’re filling out the form, or it may just ask you questions and then say it’s taking off the penalty.)
When you complete your tax return, it shouldn’t show a penalty for an early withdrawal of retirement funds. (Check this before you file.)
Don’t forget that even if you have a qualified withdrawal, you’ll still usually owe income taxes on
- Traditional IRA or 401(k) withdrawals
- Withdrawals of Roth IRA earnings (after you withdraw contributions)
- Withdrawals of Roth 401(k) earnings (you have to determine the portion of contributions vs. non-contributions on your withdrawal)
What if my Form 1099-R code is wrong?
First, remember that seeing no known exception usually doesn’t mean your 1099-R is wrong. See above for how to deal with that.
Your 1099-R is wrong when it should have a different code but doesn’t. Examples of other codes include:
- Early distributions when you’re above retirement age
- Charitable gift annuities (code F)
- Direct rollovers to other retirement plans (Codes G and H)
If your 1099-R is wrong, contact the issuer for a correction. If they won’t correct it, you may want to ask a tax professional if your understanding of your retirement withdrawals is correct.
If you’re sure you’re right and your 1099-R is wrong you may want to:
- Change it in your tax filing software so you owe the correct amount of tax. The IRS will probably send you a letter asking for an explanation. They may or may not put your tax refund on hold.
- File by mail so you can make manual changes and attach an explanation. This will likely slow your tax return processing and potential refund but could make you less likely to get a letter from the IRS as long as you paid the right tax.
As always, if you’re in a messy tax situation, you may just want to hand your taxes off to an Enrolled Agent or CPA this year instead of dealing with it yourself.