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Form 1099-R is used to describe the distribution of retirement benefits such as pensions, annuities, and other retirement plans. Variations of Form 1099-R include:
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- Form CSA 1099R,
- Form CSF 1099R and
- Form RRB-1099-R.
Most public and private pension plans that are not covered by the Civil Service system are used in the standard Form 1099-R. If you received a distribution of $10 or more from your retirement plan, you should receive a copy of Form 1099-R.
Retirement benefits are basically a form of compensation provided by the employer and employee. Most retirement plan contributions have been deferred, meaning that income tax is not paid on contributed funds until they are withdrawn by the taxpayer.
Pension and annuity distributions are usually made to retired employees, disabled employees, and in some cases to the beneficiary of a deceased employee.
- If no after-tax contributions were made to the pension plan before distribution, the entire amount is generally included in taxable income.
- However, in cases where after-tax contributions were made to an annuity or pension, only a portion of the distribution will usually be taxed.
A rollover has shifted retirement funds from one custodian to another, usually without paying taxes on the funds transferred.
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- Direct rollovers are identified on Form 1099-R by using either the G or H distribution codes in box 7.
- Indirect rollovers occur when the owner of the account takes possession of the retirement funds and re-deposits them into another qualified retirement account.
In order to avoid taxation as income and early distribution penalties, typically the funds must be rolled over into a qualified account within 60 days of distribution. Generally, you are permitted to do one indirect rollover in a 12-month period.
The proceeds from a 20% federal income tax deduction are usually distributed directly to the taxpayer. This means that the taxpayer must contribute additional funds to help to compensate for the 20% that was canceled, thus that the distribution is not taxed. However, the amount must be filed on your tax return.
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Employees may take loans against pension plans, but most loans are paid with interest and are not considered to be distributions. Form 1099-R is issued when a taxpayer does not repay the required loan payments on time.
- When this occurs, the amount not repaid is considered a distribution and is usually reported on Form 1099-R with the distribution code L.
- These distributions are deemed taxable incomeand may be subject to early distribution penalties.
Most benefits that are paid before the taxpayer has reached the age of 59 1/2 are considered to be early distributions. An additional 10% federal tax is imposed on early distributions to discourage the misuse of retirement funds. Some states also impose a state penalty on these early distributions.
If a rule applies, the additional tax applies to the whole taxable amount of the distribution. Among the following common exceptions,
- an IRS levy, and
- medical expenses exceeding 7.5% of AGI
- An exception is also met if the payments are made to an alternate payee under a qualified domestic relations (divorce) order.
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