401(k) and IRA withdrawals and Form 1099-R

What your 1099-R shows

• Box 1: the total paid to you.
• Box 2a: the taxable part, when the payer knows it.
• Box 4: the federal income tax already withheld. It counts toward what you owe, just like withholding on a W-2.
• Box 7: the distribution code, which tells what kind of withdrawal it was (for example early, normal, disability or a direct rollover).

Which part is taxed

In a traditional 401(k) or traditional IRA, the money went in untaxed, so generally everything you take out is taxed as ordinary income in the year you receive it.

If you made IRA contributions you did not deduct, that part was already taxed and is not taxed again when you take it out. That is why it matters to keep records of your contributions.

Early withdrawals: the additional 10% and its exceptions

If you withdraw money before age 59½, on top of the regular tax you may owe an additional 10% tax on the taxable part. It is figured on Form 5329.

Some exceptions remove that 10%, although the withdrawal is still subject to regular tax. Common ones include disability, certain large medical expenses, a series of equal periodic payments over several years and, in some cases, leaving your job in or after the year you reach a certain age. Others depend on the type of account, such as a first home purchase or education costs paid from an IRA.

Your 1099-R may say no exception is known: the payer does not know what you used the money for. If one applies to you, you claim it on your return.

Rollovers and Roth accounts

If you move money from one plan to another, for example from a 401(k) to an IRA, the move itself is not taxed. The safest way is a direct rollover, straight from one account to the other. If the plan pays the money to you, it usually withholds 20%, and you have a deadline set by the IRS to deposit it in the new account; anything not deposited in time is treated as a withdrawal.

In a Roth account, contributions were made with money that was already taxed. Generally, your Roth IRA contributions can come out tax-free, and the earnings come out tax-free when the withdrawal meets the age and account-age requirements. If it does not, the earnings may be taxed and hit with the additional 10%.

How Vordana Tax handles it

With Vordana Tax you can type in the boxes of your 1099-R, or upload a photo or PDF of the form to fill them in and then check them. The software puts the withdrawal on the right line of Form 1040, adds the box 4 withholding to your payments and, for an early withdrawal, figures the additional 10% on Form 5329. If an exception applies, you pick it and the software reports it on that form.

Questions