What Does Code R on a 1099-R Mean for Your Taxes?

Receiving a Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,” means you have taken money from a retirement account. This form provides the details needed to report the distribution on your tax return. Box 7 contains a distribution code that explains the nature of the withdrawal, which is important for determining how it is taxed. A 1099-R with Code R in Box 7 indicates that you have recharacterized an IRA contribution.

Understanding Code R and Recharacterized IRA Contributions

Code R on a Form 1099-R signifies a “Recharacterized IRA contribution.” This occurs when you move a contribution, plus any earnings, from one type of IRA to another. For example, you might contribute to a Roth IRA and later realize you are not eligible to do so due to your income. In this case, you could recharacterize the contribution by moving the funds to a Traditional IRA. This allows you to correct the initial contribution without penalty.

A recharacterization can also be a strategic decision. You might initially contribute to a Traditional IRA and then decide a Roth IRA is a better fit for your financial goals. As long as you complete the recharacterization by the tax filing deadline, including extensions, the IRS treats the contribution as if it were made to the second IRA from the beginning.

The financial institution that holds your IRAs will handle the transfer of funds and then issue a Form 1099-R with Code R. This form reports the movement of money out of the first IRA. The amount of the recharacterization will be shown in Box 1 of the form.

A recharacterization is different from the removal of an excess contribution. The return of an excess contribution is reported with a different code, such as Code 8. Code R is used for moving a contribution from one type of IRA to another.

Tax Implications of a Code R Distribution

A properly executed recharacterization is not a taxable event. The movement of funds from one IRA to another does not count as a taxable distribution, so the taxable amount in Box 2a of your Form 1099-R should be zero. The purpose of the Form 1099-R with Code R is to report the movement of funds to the IRS, not to report taxable income.

Because a recharacterization is not a taxable distribution, the 10% early withdrawal penalty does not apply. You are moving funds between retirement accounts, not taking money out of your retirement savings.

When you recharacterize a contribution, you must attach a statement to your tax return explaining the action. This statement should detail the following:

• The type of IRA you contributed to initially
• The date of the contribution
• The amount of the contribution and any earnings that were transferred
• The type of IRA to which the funds were moved

How to Report a Code R Distribution on Your Tax Return

When you file your federal income tax return, you will use the information from your Form 1099-R to report the recharacterization on Form 1040. This involves reporting the gross distribution and ensuring the taxable amount is correctly shown as zero.

First, locate Box 1, “Gross distribution,” on your Form 1099-R and report this total amount on Line 4a of Form 1040. Next, find Box 2a, “Taxable amount,” on your 1099-R. This box should show $0 for a recharacterization, and you will enter this amount on Line 4b of Form 1040.

By entering the gross distribution on Line 4a and zero on Line 4b, your tax return correctly reflects that the recharacterization was not a taxable event. Failing to report the recharacterization correctly could result in a notice from the IRS.