What is the IRS Code for an IRA?
IRS Form 1099-R is used to report distributions from retirement plans and accounts such as IRAs, profit sharing plans, annuities pensions insurance contracts etc.
While the IRS places some limits on what can be invested in an IRA, custodians/administrators may impose additional regulations; this is particularly relevant when it comes to self-directed IRAs.
Codes for IRAs
An IRS code for an IRA is a number or letter that represents what type of distribution was received. These codes appear on Form 1099-R which reports distributions from profit-sharing plans, retirement accounts, annuities, pensions, insurance contracts, survivor income benefit plans and other tax-favored accounts.
Code 1 can be used to report regular distributions from an IRA for taxpayers under age 59 1/2 who do not meet any exception (refer to instructions for Form 5329 for more details). Other early distributions require special rules; examples could include those related to annuities or life insurance contracts.
Code J can be used to report Roth IRA distributions when the five-year waiting period has not yet passed and Codes Q or T do not apply. Furthermore, Code J should also be used when reporting qualified distributions for first-time homebuyer expenses as well as Roth IRA modifications made prior to reaching five years in duration.
Codes for IRA Rollovers
Rollovers from qualified employer plans such as 401(k), 403(b), or government Section 457(b) plans into another qualified plan or traditional IRA are exempt from an early withdrawal penalty; however, recipients must make an election for federal income tax withholding and transfer any amount withheld directly to their new IRA trustee within 60 days.
If the distribution is from a pretax Roth solo IRA to another type of pretax IRA, use code G. This code also can be used for direct rollovers from pretax IRAs into Roth IRAs as well as conversions within in-plan Roth accounts.
Owen is receiving a distribution from a traditional IRA that holds stock with no readily available fair market value, such as ownership interests in corporations that don’t trade on an established securities exchange. Owen used code 1 as his distribution type because he’s under age 59 1/2 with no known exceptions to account for.
Codes for IRA Distributions
When reporting IRA distributions on IRS Form 1099-R, your organization must carefully consider what codes to enter in box 7. Misleading entries could prompt the IRS to propose changes to recipient taxes.
Use code A, Potential Eligible for 10-Year Tax Option, when reporting lump-sum distributions from traditional or SEP IRAs for plan participants born before January 2, 1936 (and their beneficiaries) eligible to use the 10-year income averaging method. You should also report Roth conversions that can later be reconverted back to traditional IRAs using code A.
Code 4 should be used when reporting distributions made after the death of a Traditional or SIMPLE IRA owner or participant and when certain distributions from qualified pension, profit-sharing, retirement plans, IRAs and insurance contracts qualify. It should also be used when reporting certain reportable death benefits or when engaging in prohibited transactions by an IRA owner or participant.
Codes for IRA Withdrawals
When an individual withdraws funds from his or her IRA, the IRS will report this transaction on Form 1099-R and use this data to ascertain whether the distribution is tax liable.
Owen converted from a Traditional to Roth IRA in 2022. Which distribution code should the organization use for this transaction?
An organization should report code N, Same-Year Recharacterization of an IRA Contribution, when an IRA contribution deposited in 2019 is being recharacterized in 2020 (a “same-year recharacterization”). This code should not be combined with any other codes. When excess employer contributions or earnings deposited in 2019 are returned back to an IRA owner via National Ira Accountability Center in 2020 NIA is to be reported; code E is to be used alongside codes 4, 7, or 8.