The 1099-R Form is used to record retirement distributions. This doesn’t mean you have to be in retirement to take a distribution. A distribution can occur before retirement, but there are consequences for early withdrawals. Regardless, a 1099-R form is used in both cases. One of those cases is called Code 1. In this article, we’ll discuss what these various codes mean.
What Is A 1099-R Form?
A 1099-R Form is used for retirement distributions. Whether you’re retired or not, this form follows any funds taken out of a retirement account (i.e., Roth IRA, 401k, Traditional IRA, etc.).
A 1099-R looks similar to many of the other 1099 form variations such as a 1099-MISC, 1099-DIV, and 1099-INT. They are fairly short forms.
In this form, an investor will include identifying information, the amount to withdraw, the taxable amount of the withdrawal, and other details about the withdrawal. One section on the form is used to better identify why funds are coming out of retirement. It is called the Distribution Code.
What Is Code 1?
The Distribution Code, which is box 7 on the 1099-R, further identifies the reason for the withdrawal. There are several codes that can be used. All of these codes are listed in the instructions for the 1099-R Form.
Some codes are numbers while others are letters. Code 1 is used for early withdrawal from the plan. This means an investor is withdrawing funds from their retirement before they’ve entered into retirement.
There can be many reasons why an investor might do an early withdrawal of funds from their retirement. Common reasons are a financial or medical emergency. Some investors may withdraw funds to start a business or use them for school-related expenses.
Any early withdrawal is usually subject to a 10% penalty. Taxes may also be owed on the withdrawn amount. It depends on the scenario. Some exclusions to the 10% penalty include:
- Disability
- Education
- Qualified first-time homebuyers
You can see a full list of exceptions to the 10% penalty in the IRS’s Retirement Topics - Exceptions to Tax on Early Distributions document.
Some other codes that can be used in box 7 include:
- Code 2 — Early withdrawal with a known exception to the penalty. Not subject to the 10% penalty for early withdrawal.
- Code 3 — Permanent and totally disabled. Not subject to the 10% penalty for early withdrawal.
- Code 4 — Death of the account holder. Not subject to the 10% penalty for early withdrawal.
- Code 7 — Normal distribution. Not subject to the 10% penalty for early withdrawal.
- Code G — Direct rollover from one tax-advantaged account to another. Not taxable.
The “not subject to 10% penalty” codes match many of the exclusions listed in the above-linked IRS document.
Filling out the 1099-R Form correctly is essential to ensuring that you aren’t penalized or taxed unexpectedly. A tax advisor can help you when filling out this form.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
