How Are 1099-R Forms Coded for Roth Conversions?

You must pay taxes on a conversion to a Roth retirement plan if the funds you converted were originally set in a pre-tax retirement plan, and you must report the conversion on your tax return. You’ll receive an Internal Revenue Service Form 1099-R from your IRA custodian, properly coded, to help you out.

Exploring the Purpose of 1099-R

Internal Revenue Service Form 1099-R is used to report any distributions from your pension, annuity or retirement plans. This form is filled out and sent by your plan’s custodian to both the IRS and yourself. The form’s purpose is to notify the IRS of any potentially taxable event from your retirement plan. Its purpose also serves you, in that it reports to you critical information you need to properly fill out and file your tax returns.

Defining a Taxable Event

If you decide to roll over money from an existing traditional retirement plan into a Roth plan, you’re expected to pay taxes on the conversion amount at the time of conversion. The reason you must pay taxes on the rollover is because you are transferring your funds from a pre-tax account to a post-tax account, meaning you won’t be paying taxes on the Roth funds when you take the distributions upon retirement; therefore, you must pay the taxes now.

Gathering Additional 1099-R Information

The 1099-R form works just like your W-2 form from your employer; you take the information provided on the 1099-R and plug it in to the appropriate fields on your tax return forms. The 1099-R lists your retirement plan custodian’s name, address and tax identification number, as well the gross and net amounts of your Roth retirement plan conversion. You will see box 2b “Taxable amount not determined” checked if your applicable taxes were not pulled from your conversion money.

Defining 1099-R Codes

Your age dictates the 1099-R conversion code, which appears in box 7 “Distribution code(s).” If you have not yet reached age 59 1/2, your custodian will place a “2” in box 7. If you are 59 1/2 or older, your box 7 code is “7.” The “IRA/SEP/SIMPLE” box should also be checked if you’re 59 1/2 or older. This lets the IRS know whether you meet the minimum age requirements for distribution from your retirement plan.

A conversion is not a distribution – but you can slip up and turn a conversion into a penalized distribution if you fail to follow the rules closely.

Assessing Other Considerations

You have 60 days to roll your conversion money – including any funds taken from the balance to pay associated taxes – over to the new Roth account. If you don’t make the appropriate deposit in that time, you will be charged a 10-percent early distribution penalty on any unqualified amounts plus the taxes that will be due, so make sure your conversion is completed within the 60-day time period without a hitch.