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Your Distribution is Taxable in the Year It’s Distributed

Your Distribution is Taxable in the Year It’s Distributed

Clients ask us regularly, “What tax year should I report my retirement plan distribution in?” The best indicator of the tax year is the IRS Form 1099-R that accompanies your distribution.

Retirement Plan payors such as employers, trustees and custodians report any retirement plan (i.e., IRAs and employer plans) transaction in the year it occurs. The tax year on the form, as well as the IRS code it displays, will note the tax year and type of distribution.

Many people think that a distribution check isn’t taxable until it’s cashed—this is false. The IRS recently issued Revenue Ruling 2019-19 reaffirming that taxation does not defer based on when the distribution check is cashed; a distribution is taxable in the tax year it is distributed.

For example, let’s say you request a distribution from a retirement plan in October of 2019 and you fail to cash the distribution check until February of the next year, 2020. The distribution is still taxable in the year it’s distributed (2019), not in 2020, when you cash the check.

The same goes for the distribution withholding requirement. Distributions from retirement plans are subject to a withholding requirement under the tax code. Typically, the percentage is 10% unless the distribution is an eligible rollover distribution from an employer plan, in which case, the percentage of withholding increases to 20%. The withheld amount is remitted to the IRS in the same year the distribution occurs.

Here are some examples where this might apply:

Example # 1

An employer plan distributes an employee’s required minimum distribution in December of 2018. The plan participant receives the check in January of 2019. The distribution is taxable in 2018 because that’s when the distribution took place. The IRS Form 1099-R was also generated in 2018. The amount will be at least 10% which is the mandatory withholding amount for all distributions.

Example #2

An IRA custodian provides a notice of resignation which in turn, provides a period of 30 days for the IRA holder to find a new custodian for their investment. If the IRA holder doesn’t move the assets to another custodian, the assets will be distributed and the fair market value of the assets will be reported as such on the IRS Form 1099-R in the year of distribution. The amount of the fair market valuation will be taxable in that year unless it’s rolled over to another eligible retirement plan within the 60-day period. 

Ultimately, a distribution is always taxable in the tax year in which it is distributed. Check your distribution’s 1099-R to avoid confusion.

 

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