1099-R explained: What you should know if you’re pulling cash from a retirement fund to pay for unexpected expenses

When you start planning for retirement, the hope is that you will set aside money and it will grow until you leave the working world to spend your time on things other than working at a job. 

However, life happens. There are going to be times when you will need money to pay for things that pop up. It is at times like these that you will want to pull money out of your IRA.

However, you do need to be careful.  If you pull money out before you reach age 59-and-a-half, you will face a 10% penalty for early withdraw.  This would apply if you were pulling money out of either a Roth or Traditional IRAs.

However, it only applies to the amount of the distribution that is included in gross income.  Therefore, it does not apply to the part of your distribution that is a return of your contributions.

However, this is not a hard and fast rule.  There are certain instances where you will not be subject to the 59 and-a-half rule.  When you receive your 1099-R that shows the amount you received, Box 7 will have a code in it that will signify what type of distribution it is. 

Let’s take a look at these codes and what they mean.

If you see Code 1 in box seven, you have had a separation of service. 

• This means you received the distribution in the year you turned 55 or 50 if you are a qualified public safety employee. 
• A public safety employee is someone from any level of government (federal, state or local) who is a police officer, firefighter, customs official, border patrol agent, air traffic controller, or provides emergency medical services. 
• Keep in mind that this code does not apply to IRAs.

Code 2 in box seven means that you have received a distribution that is part of a series of substantially equal periodic payments. 

• Unless the payment schedule is modified before you reach age 59 and-a-half.

If you have a total and permanent disability, you should see a three in box seven, indicating that the payments you receive are due to a disability.

Code 4 in box seven means that you are receiving the payment as a beneficiary of the participant in the plan, who has died.

If you have received a distribution from the retirement plan to pay for unreimbursed medical costs, box seven will have a five in it.  

If you underwent a divorce, and as part of qualified domestic relations order fund were distributed from a retirement plan (other than an IRA), box seven with having a six written in it.

If you have left a job and have been receiving unemployment compensation for 12 consecutive weeks, you can receive money from a retirement plan to pay for unemployment health insurance. 

• If that is the case, you should see a seven in Box 7 of your 1099-R.

You can make withdraws from an IRA to pay for education costs, including tuition, supplies, books, and room and board for someone who is a half-time student. 

• This withdrawal would be indicated by an eight in Box 7.

First-time homebuyers are allowed to withdraw up to $10,000 from an IRA to purchase a home. 

• The $10,000 is a lifetime limit, and you must not have owned a home for at least two years. If you are married, both you and your spouse are entitled to a $10,000 lifetime withdraw. 
• The number nine will show in Box 7 if you have made this type of withdrawal.

Code 10 in Box 7 indicates that a distribution was made from a retirement plan to pay an IRS levy.

If you are a reservist called to active duty for a period of 180 days or more, or for an indefinite period, if number 11 appears in in Box 7 indicates that you have received a qualified reservist deferral.

Need some help with understanding your options when it comes to early retirement distributions? 

Drop me a line at [email protected] and we can discuss your situation and how best to take advantage of the deductions and credits available to you.

In accordance with Circular 230 Treasury Department Regulations, we are required to advise you that any tax advice contained in this article may not be relied upon to avoid penalties under the Internal Revenue Code. 

If you are interested in a written opinion that can be relied upon to prevent the imposition of tax-related penalties, please contact the author.