If you own an IRA (or any qualified retirement savings account), there are two IRS tax forms you should be familiar with – even if you engage an accountant to prepare your tax return. Making sure these forms are accurate when you file your tax return can help you avoid paying additional tax.
IRA Taxation Reminder
Any money you take out of your Traditional, SEP, or SIMPLE IRA is generally taxable to you in the year it is distributed from the IRA unless it is rolled over to another IRA or retirement plan. A distribution from a Traditional IRA may be only partially taxable if you have made nondeductible contributions or rollovers of any after-tax amounts to any of your Traditional IRAs. Roth IRA distributions may or may not be taxable. The entire amount of a qualified distribution is tax-free. If a Roth IRA distribution is not qualified, the portion of the distribution representing contributions will be distributed tax-free, and the portion representing investment earnings will be taxable. The taxable portion of any IRA distribution is also subject to a 10% early distribution tax if you are not yet age 59½ and do not meet one of the IRS’s exceptions to the additional tax.
IRS Form 1099-R – Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
IRS Form 1099-R is prepared by your IRA custodian to report distributions from your IRA, even if you rolled over the distribution to another IRA. (IRA-to-IRA transfers, where you do not have receipt of the money, are not reported.) A copy of the Form 1099-R must be provided or mailed to you by January 31 following the year of the distribution and will be provided to the IRS. You will need your Form 1099-R when you file your income tax return for the year.
Form 1099-R reports the gross amount distributed from your IRA whether the distribution was payable to you, rolled over, converted or recharacterized. It can also report the taxable and nontaxable portion of a distribution. However, because IRA custodians cannot keep track of your basis (e.g., nondeductible contributions) across all of your IRAs, the “Taxable amount not determined” box will usually be checked. Any federal or state income tax withheld on the distribution is also shown on Form 1099-R.
In addition to making sure all the information on Form 1099-R is correct, you’ll want to make sure the correct distribution code is reported in box 7. An IRS distribution code is assigned to each distribution to alert the IRS as to whether a distribution may be taxable or subject to the 10% early distribution tax. If an incorrect code appears, you may be targeted by the IRS for improper reporting or improper payment of taxes. Here are some of the more common distribution codes and what they mean:
| IRS Code | Description of Distribution |
| 1 | Distribution to an IRA owner who is younger than age 59½ and does not meet any of the IRS’s exceptions to the 10% early distribution tax, or meets an exception that does not have its own distribution code (e.g., distributions taken to pay for medical expenses, health insurance premiums, higher education) |
| 2 | Distribution to an IRA owner younger than age 59½ who meets one of the following exceptions to the 10% early distribution tax: distribution under a substantially equal periodic payment arrangement, distribution for an IRS levy, or a direct conversion to a Roth IRA |
| 3 | Distribution to an IRA owner who meets the IRS definition of disabled (exception to 10% early distribution tax) |
| 4 | Distribution to a beneficiary (exception to 10% early distribution tax) |
| 7 | Distribution to an IRA owner who has reached age 59½ and is no longer subject to the 10% early distribution tax |
| J | Distribution to a Roth IRA owner younger than 59½ |
| K | Distribution of hard-to-value assets |
| Q | Qualified distribution from a Roth IRA (i.e., the Roth IRA owner has had a Roth IRA for 5 years and has reached age 59½, died, become disabled, or met the first-time homebuyer requirements) |
| T | Distribution to a Roth IRA owner who has attained age 59½, died or is disabled, but the IRA custodian doesn’t know if the 5-year rule has been satisfied for purposes of a qualified Roth distribution |
If you believe there is an error on your Form 1099-R, contact your IRA custodian as soon as possible to correct the reporting. A correction will be filed with the IRS.
Form 5329 – Additional Taxes on Qualified Plans (including IRAs) and Other Tax Favored Accounts
Form 5329 is an IRS form you are required to file with your tax return to explain certain types of IRA transactions to the IRS and pay a penalty tax when required. You must file Form 5329 in the following situations:
| You have taken a Roth IRA distribution that | · Includes taxable dollars (i.e., a nonqualified distribution that includes earnings), or
· Includes an amount that you converted less than 5 years ago, or · Qualifies for the first-time homebuyer exception to the 10% early distribution tax |
| You have taken a Traditional, SEP, or SIMPLE IRA early distribution that | Is subject to the 10% early distribution tax (25% for SIMPLE IRAs) but you meet an exception and Form 1099-R doesn’t indicate an exception or the exception doesn’t apply to the entire distribution amount
NOTE: If Code 1 is correctly shown on Form 1099-R, and you are not disputing the additional tax owed, you do not need to file Form 5329 to pay the additional tax. |
| You made an excess Traditional or Roth IRA contribution and | · Are withdrawing earnings along with an excess contribution, or
· You failed to timely remove an excess contribution from your IRA |
| You are subject to RMDs from your Traditional, SEP, or SIMPLE IRA and | You failed to take your required minimum distribution (RMD) by the deadline |
For More Information
If you have any questions about your tax forms for your STRATA Trust IRA, please contact us at 866-928-9394 or Service@StrataTrust.com.
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