Tax Tip Tuesday: Some IRA Distributions Require Self-Reporting on Your Tax Return

Feb 4, 2025

By Theresa Cagle Fry, Senior Vice President and Manager IRAs, Retirement & Education Planning
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It’s tax season again. Whether you decide to tackle your tax return yourself or use a tax professional, it’s time to get organized as your tax forms begin arriving. If you took money out of your IRA last year, one of the forms you’ll receive will be the 1099-R. IRS Form 1099-R can be confusing because amounts reported as “taxable” don’t always result in an income tax liability and items that may be reported as “early,” which are typically subject to a 10% IRS penalty, aren’t always subject to that penalty. Some types of IRA distributions require you to self-report your specific circumstances on your income tax return, so taxes and penalties are not applied.

If you received a 1099-R and it’s not quite what you expected it to say, don’t panic! Here are a few common situations where the 1099-R doesn’t need to be corrected, but self-reporting on your tax return is required:

  • Rollovers between IRAs
  • Qualified charitable distributions (QCDs)
  • Distributions of non-deductible contributions
  • Certain exceptions to the 10% early withdrawal penalty when you are younger than age 59 ½

Rollovers Between IRAs
A distribution from an IRA that is rolled over into the same or another IRA is generally income tax-free if the rollover is completed within 60 calendar days, you have not completed any other IRA-to-IRA rollovers in the past 12 months, and you roll over the same “property” that was distributed to you.

IRS Form 1099-R only reports what was distributed from an IRA, not what is rolled into one. Rollover deposits are reported on a separate tax form – Form 5498 – sent to you and the IRS in May. Even though the 1099-R will show an IRA distribution as taxable, when you complete your income tax return, you or your tax professional can self-report the rollover. IRS instructions for completing your tax return provide details on how to do this. The Form 5498 does not have to be attached to your tax return, but it does provide verification of the completed rollover to both you and the IRS after you have reported it on your income tax return.

Qualified Charitable Distributions (QCDs)
Qualified charitable distributions are tax-free gifts made directly from your IRA to a qualified charity when you are age 70 ½ or older. If you made a QCD and excluded the gift from your taxable income, keep in mind that you cannot also take a tax deduction for the QCD as a charitable gift.

Like other IRA distributions, QCDs are reported on Form 1099-R as a taxable amount. Again, IRS instructions explain how to report a QCD on your income tax return. In addition, the charity should provide you with a receipt for the gift they received to retain with your tax records.

Distributions of Non-Deductible Contributions
Non-deductible contributions are also reported by you on your income tax return, not on Form 1099-R. At the time you made a non-deductible contribution, you would have reported it to the IRS when you filed your income tax return by completing IRS Form 8606. It keeps track of the after-tax dollars in your IRA, so you do not pay taxes on them twice—on the way in and on the way out.

When you take an IRA distribution and previously made nondeductible contributions, distributions are taxed on a pro-rata basis. You will use Form 8606 to compute the amount of distribution that is taxable and to determine the amount of nondeductible dollars that remain in the IRA after the distribution.

Exceptions to the 10% Early Withdrawal Penalty
When you receive a distribution from your IRA and you are younger than age 59 ½, the IRS may impose a 10% early withdrawal penalty tax in addition to the income taxes that are due. There are many exceptions to the 10% early withdrawal penalty, including distributions paid to you if you are disabled, or to a beneficiary after your death or for substantially equal periodic payments (also known as 72(t) withdrawals). But there are also some that are connected to what you use the distribution for. Here are a few examples:

  • Purchasing your first home (up to $10,000)
  • Qualified college education expenses for you, your spouse, your children or grandchildren
  • Disaster-related expenses (up to $22,000 per disaster)
  • Qualified birth or adoption expenses (up to $5,000 per child)
  • Qualified emergency withdrawals (up to $1,000 per year, if repaid)

These types of distributions, among others, may qualify for an exception to the 10% penalty tax if you meet certain conditions established by the IRS.

Exceptions like these also require self-reporting on your income tax return. Financial institutions will generally report your distribution as “early distribution, no known exception” on Form 1099-R because you were younger than age 59 ½ at the time of the distribution. When you complete your income tax return, you can include IRS Form 5329 to document the appropriate exception that applies in your situation.

Tax season can be a confusing and stressful time. Your financial advisor is here to help and can work together with you and your tax professional as you maneuver through this tax season.

 

IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.