A 60-second read by Nicholas Scheibner: You will receive a form 1099-R if any money has been moved out of a retirement account. How much you will pay in taxes will depend on how the money is moved. You want to make sure any movement out of a retirement account is done properly, and the correct code is applied when you file your taxes. The code will appear in box 7 of the 1099-R.
Here are some of the most common codes used on the form, and what they mean:
Code: 1 – This means that you took money out of the account before you were 59 ½ and did not qualify for an exception. If this is the code on your form, you may be assessed a 10% penalty on your withdrawal.
Code: 4 – This code applies when the account holder dies. Money can then be rolled into an inherited account, the spouse’s own account, or distributed to the estate.
Code: 7 – This code applies to a normal distribution, after you turn 59 ½. There should be no penalties on this. You will see this code any time you withdraw from your IRA or 401(k)s.
Code: B – This code will apply only to Roth accounts.
Code: G – You want to see this code if you are transferring one retirement account to another. By doing a “direct rollover” you will not be assessed taxes or penalties. If a check is sent to you, you will have 60 days to deposit the funds into a new retirement account, before taxes and penalties are accessed. Form 5498 proves the money was deposited correctly.
For IRA’s, you may also receive a 5498 when you contribute to your account.
How do I correct an “incorrect” code? Reach out to your custodian. You may need to file form 5498 in some circumstances.
Please reach out to the Baron Team if you have any questions.
Disclosure: This material is not intended to be relied upon as a forecast, research, tax or investment advice. Please consult your financial planning and tax professional for personal advice.