If you’ve received retirement payments throughout the year from your pension, annuity, or similar type of plan, you’ll receive a Form 1099-R as a report of the fund distribution.
When you set up a retirement fund with your employer, you are essentially arranging a compensation agreement. Most retirement plans don’t withhold income tax on monies contributed, and instead the tax is paid when it is distributed to the employee.
After an employee retires or becomes disabled, he or she can begin receiving pension and annuity distributions. Depending on the arrangement, the payments may be made to the beneficiary of a deceased employee. If the employee made contributions after-tax, only a section of the retirement payments are subject to tax. On the other hand, contributions made pre-tax are normally entirely included in taxable income when distributed.
When a taxpayer choses to redirect retirement funds from one account to another without paying the taxes, they are performing a rollover. Form 1099-R will specify any direct rollovers in box 7 with either G or H codes.
Any payments received prior to the taxpayer turning 59 ½ years of age are considered early distribution, and are subject to additional taxes. The government instills a 10% tax on early distributions in an effort to stray people away from using their retirement funds for other purposes. In addition to the federal government, early distributions may be subject to state penalties.
There are a few exceptions which may alter the installation of this tax to the entire distribution amount. Some of these exceptions are: death, disability, medical expenses greater than 10% of your AGI, and an IRS levy.