Soon, you’ll be getting a copy of your 2014 IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., if you took an IRA distribution last year. Our great friend, Joe Cicchinelli, IRA Technical Expert from the Ed Slott organization wrote this quick synopsis.
Your IRA custodian is generally required to send you a copy by January 31 of the following year, but because January 31, 2015 is a Saturday, you will be sent a copy by Monday February 2, 2015.
In box 7, Distribution code(s), the IRA custodian has to put a code that identifies what type of distribution you received. The codes are explained on the back of your copy of Form 1099-R. A common source of confusion happens if you took an early distribution (a distribution you took before you turned age 59 ½). Specifically, there are two possible codes that can be used to identify your early distribution, and unfortunately the IRS codes are bit confusing.
Code 1, Early distribution, no known exception, is used if you took an early distribution and the IRA custodian didn’t know if any exceptions to the 10% early distribution penalty applied. However, even if you told the custodian that an exception to the penalty did apply, they still must use Code 1 to report a distribution that was made for medical expenses, a first-time home purchase, health insurance premiums if you were unemployed, higher education expenses, or a qualified reservist distribution. While all of these distributions are an exception to the penalty, the custodian reports them as if the penalty applies. If you qualify for one of these exceptions, you must file IRS Form 5329 to get out of paying the penalty. So, having a Code 1 on your Form 1099-R doesn’t necessarily mean you owe the 10% penalty.
Code 2, Early distribution, exception applies, is used only if you took an early distribution and the IRA custodian knows that the IRA distribution was converted to a Roth IRA, was made on account of an IRS levy, or was a 72(t) distribution (also known as substantially equal periodic payments). These three types of IRA distributions are an exception to the 10% penalty too, but they are also reported as an exception to the penalty. You don’t have to file Form 5329 because Code 2 tells IRS that you qualify for an exception.
You were warned. It was confusing.