Thursday, March 5, 2009

Why Did I Get a Retirement Tax Form if I’m Not Retired?

Why did that get that 1099-R form from my 401(k)? The 1099-R form reports distributions made from your 401(k), IRA, or other pension plan. This form is issued when money is withdrawn from your tax-deferred retirement account. Luckily, losing money in the stock market does not generate this form.

Hopefully, if you have withdrawn money from your retirement account, it is because you have retired. This is a taxable transaction. If you’ve lost your job and needed the money to pay day-to-day bills, you have to report the distribution as income and pay taxes on it. You also may pay a 10% penalty for withdrawing the money.

Switching trustees or investments are also reasons for receiving a 1099-R. Transferring money from one IRA to another or from your 401(k) to an IRA is not a taxable event. You do not have to pay tax when you transfer money in this fashion. This is when "Why did I get that retirement form?" becomes a very good question. IF I don’t have to pay tax, why is the IRS being told I took the money?

The reason they are being told is simple: the law requires that all distributions be reported to the IRS. If you take a good look at the 1099-R you should see that the IRS is also being told that it is not a taxable event. Box 7, Distribution Codes is the spot to look for on the form. A "G" in that box tells the IRS that you transferred money directly from your 401(k) to your IRA (or wherever you transferred money from and to). It also tells the IRS that you do not have to pay tax on the distribution

If you get one of these forms with a G in box 7, you report the gross distribution in box 15a or 16a on your 1040 form. You do not put anything is box 15b or 16b. By doing this you are telling the IRS that you know you got the form and that it is not taxable. This should eliminate any nasty letters from the IRS I mentioned in a previous posting


Anonymous said...

What can you do if you have the money but have gone beyond the 60 day limit?


Thom said...


Sorry but the 60 day limit is a hard and fast rule. There is no way around paying the tax once you exceed 60 days. You also probably will pay a 10% penalty (unless you are older than 59-1/2) on the distribution.

You might fit into one of the exceptions to avoid the 10% penalty on early withdrawals. The most popular ones are Medical insurance for unemployed individuals, Education expenses and first time homebuyers.


Anonymous said...

Hi Thom,

I changed jobs and took an early distribution from my retirement account. I requested distribution in mid-December, and the request was processed based on fund values at 12/31/08. The checks were issued dated 1/6/09, and they were mailed, received, and cashed in 2009. Since the request was processed in 2008, but the cash was received in 2009, is this a 2008 or 2009 taxable event? I haven't received a 1099-R from the bank...

Thom said...

Thanks for asking the questions. I wish more folks would do that.

The date the checks are issued is the controlling date for this type of taxable event. Thus it is a tax problem for 2009 rather than 2008. You should receieve a 1099-R a year from now for 2009.