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1099-R: WHAT IS IT AND WHO FILES IT?

The 1099-R is used to report any distribution to the IRS that is paid to an individual from a retirement plan, retirement annuity, profit-sharing plan, individual retirement account (IRA), insurance contract or pension fund.

Most companies that manage public and private pension plans that are not part of the Civil Service system use the standard 1099-R to report distributions. If you receive multiple payment from a combination of funds set up for your retirement, you will get an 1099-R for each plan.

The form is filed by the plan administrator who, in turn, sends a copy to the recipient. It’s an information form for the IRS to ensure income from retirement funds and annuities are not under-reported. The recipient uses the 1099-R to complete and file his/her federal tax return.

WHAT INFORMATION DOES THE 1099-R RECORD?

The 1099-R is completed and filed for any distribution of $10 or more earned by a recipient from any of the following:

  • profit-sharing or retirement plans
  • retirement annuity
  • individual retirement account (IRA)
  • company pension fund
  • insurance contract or survivor income benefit plan
  • permanent or total disability payments from a life insurance contract
  • charitable gift annuity

The 1099-R is also used to report death benefit payments made by employers that are separate to a pension, profit-sharing or retirement plan.

As a rule, it is not necessary to report payments that are:

  • subject to withholding of social security and Medicare taxes. Such payments are reported on the W-2 (wage and tax statement)
  • totally exempt from tax, such as workers’ compensation and payments made by the Department of Veterans Affairs (VA).
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WHY ARE PENSION AND ANNUITY PAYMENTS REPORTED?

Retirement benefits that are paid to a retiree are an extension of compensation between the employer and employee that has been pre-arranged by setting up a retirement plan, annuity or IRA. Most retirement plan contributions are deferred which means that it is only taxable once the funds have been withdrawn by the employee.

The same applies for contributions made to employees that no longer work for the company because of a disability or they have died.

If an after-tax contribution has been made to an annuity or pension plan, only a portion of the distribution is taxable.

REPORTING LOANS ON THE 1099-R

Companies sometimes allow an employee the option of taking a loan against his/her pension plan. The loan is repaid with interest and the loan is not considered to be a distribution. However, the 1099-R is filed when an employee fails to make the loan payment on time.

The IRS views the amount that is not paid on time to be a distribution which is taxable. It may also be subject to early distribution penalties.

REPORTING ROLLOVERS ON THE 1099-R

Some payments from a retirement plan or annuity distribution can be ‘rolled over’. This is done by depositing the payment into another retirement plan or IRA within 60 days of the date of distribution. It’s most common when a taxpayer leaves a company long before they are ready to retire and opt to roll it over to a retirement fund at the next company he/she joins.

A retirement plan distribution is not taxed if it is rolled over. It is only subject to tax when it is withdrawn from the new plan. However, you need to report the distribution on your tax return because it will be seen by the IRS as withdrawn from the old plan.

There are different types of eligible rollover distributions which occur in the following ways:
Direct transfers
When the plan administrator pays the full distribution across to another retirement plan or IRA
Trustee-to-trustee transfers
When a financial institution sends a payment or distribution directly to a trust managed by another financial institution
60-day transfers
When a payment or distribution is made directly to the taxpayer; where taxes are normally but not always withheld. The taxpayer has 60 days to deposit all or part of the distribution with another retirement plan or IRA.

REPORTING EARLY DISTRIBUTIONS ON THE 1099-R

A retirement benefit that is paid to an employee before he/she has reached the age of 59 years and 6 months is considered by the IRS to be an early distribution. An additional federal tax is imposed on early distributions in order to discourage employees drawing on a retirement fund too early and the general misuse of retirement funds.

Some states impose a state penalty for early distributions. Common exceptions include:

  • disability
  • death
  • an IRS levy
  • medical expenses incurred which exceed 10% of the employee’s adjusted gross income
  • payments made to an alternate payee as a result of a divorce

An IRS levy is an administrative action by the IRS which falls under United States Federal Law where, without going to court, property or assets are seized to collect money to pay outstanding federal taxes. The IRS levy includes the “power of distraint and seizure by any means”.

PENALTY FOR NOT FILING THE 1099-R

The IRS will impose a penalty if you fail to file the 1099-R on time and/or fail to supply the recipient on time. The IRS also imposes a penalty if the required information is not recorded, such as tax identification number. Refer to the IRS website for the latest penalty fees.

WHERE DO YOU GET THE 1099-K

The 1099 forms are pre-printed in triplicate by the IRS and dated. You must use the correct form for the current year; marked on the forms on the bottom in black lettering.

You have the following options:

  • order the forms from the IRS and collect from the IRS service centre
  • purchase the forms from the post office or a stationary outlet
  • purchase the forms online from a reputable source

You can file any 1099 form online with the IRS using the FIRE System (Filing Electronic Returns Electronically) online.

DOWNLOAD 1099 FORMS HERE

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