Tax-filing tips for retirement fund withdrawals
Millions of individuals took withdrawals from their IRAs, 401(k)s, pensions and other types of retirement accounts in 2014. When you do this, you need to know how to report these distributions on your tax return.
The first thing to know is that if you took money out of your retirement accounts last year, you should have received a Form 1099 R. This form reports to the IRS the amount of your total withdrawals from a retirement account during the year. If you withdrew from several accounts, you should receive a Form 1099 R from each one.
The administrator of your retirement plan or custodian of your IRA sends the 1099, and it's not uncommon for these forms to have errors. So, pay careful attention to the information in several boxes to ensure that your 1099 is correct and that you report the information on your tax return correctly.
Here's the basic 1099 information you need to know:
Box 1 gross distribution: This includes the total of all withdrawals you took from a retirement plan or an IRA. Check your monthly account statements to ensure they agree with the 1099 R. If the 1099 amount is correct, report the amount in Box 1 on line 15a for IRA distributions and line 16a for distributions from pensions, 401(k)s and annuities of your Form 1040.
Box 2a taxable amount: Usually this will be the same amount as what was reported in Box 1, but it could also be lower. For example, if you had contributed aftertax dollars into your 401(k) plan in the past, then when those after-tax contributions are withdrawn, they're tax-free and, therefore, would reduce the taxable amount of the total distribution. If you think you made aftertax contributions in the past and that the taxable amount is not reduced by that withdrawal amount, contact the firm that sent the 1099.
Here's a clue that this amount isn't correct: Look at box 2b. If the box for "Taxable amount not determined" is checked, that means the form's provider didn't have enough information to correctly report any aftertax contributions.
If this amount is correct, you can report the amount in Box 2a on line 15b for IRA distributions and line 16b for distributions from pensions, 401(k)s and annuities of your Form 1040.
Box 4 federal income tax withheld: This includes the amount of any federal income tax that was withheld from the withdrawals. For example, you may have elected to have 10 percent withheld from a withdrawal at the time you requested it. If you received a taxable withdrawal from a retirement plan such as a 401(k) plan, federal income taxes are typically withheld at a rate of 20 percent. Make sure to include the taxes that are reported in this box on your tax return on line 64, federal income tax withheld from Forms W-2 and 1099. Any state taxes withheld are included in box 12, and they should also be reported on your state tax return.
Box 7 distributions codes: More than 27 different codes could be included, which vary by the type of plan and distribution taken. The three most common codes are:
- Code 1 early distribution - no exception: This applies to individuals who take early withdrawals (before age 59 1/2) that are directly paid to themselves and not to a rollover IRA. Unless there is an exception, the taxable amount of the distribution is also subject to a 10 percent penalty tax on early withdrawals. To calculate and report this penalty tax on your tax return, you'll need to also file Form 5329, Additional Taxes on Retirement Plans and IRAs. Make sure to reduce the amount subject to this penalty tax by the amount of the nontaxable portion of your withdrawals (i.e. the aftertax contributions).
- Code 7 normal distribution: This applies to individuals who take normal distributions from retirement accounts after age 59 1/2. This code indicates to the IRS that this is not an early withdrawal. Therefore, no penalty tax applies.
- Code G direct rollover of a distribution: If you had your 401(k) directly rolled over to an IRA (when the plan transfers your entire taxable balance directly to your rollover IRA, without passing though your hands), this is the code you will want to see. It alerts the IRS that none of this distribution was taxable. Therefore, you also won't have to report any amount on line 16b of your tax return.
If your 1099 has any errors and you don't request a corrected form, the IRS may later on send a notice of additional tax due, requiring you to provide the information to explain what actually happened. It's a lot easier to request a corrected Form 1099 R now, than dealing with the IRS later. Trust me on that.
