What to Know About the Great-West Retirement Services 1099-R Form

Tax season can be confusing, especially when dealing with forms related to retirement accounts. One such form is the 1099-R, which reports distributions from pensions, annuities, IRAs, and other retirement plans, including those managed by Great-West Retirement Services. Understanding this document is important because it determines how much of your distribution is taxable and whether any penalties apply.

Since different types of withdrawals have varying tax implications, knowing what’s on your 1099-R helps you avoid surprises when filing your return.

Reasons for Receiving a 1099-R

Receiving a 1099-R from Great-West Retirement Services means a distribution was made from a retirement account during the tax year. These distributions occur for several reasons, each with different tax consequences.

One common reason is reaching the age of required minimum distributions (RMDs). Once an account holder turns 73, the IRS mandates annual withdrawals from tax-deferred retirement accounts like 401(k)s and traditional IRAs. Failing to withdraw the required amount results in a 25% penalty on the shortfall.

Another reason is a lump-sum withdrawal, often taken when leaving an employer or consolidating accounts. While this provides immediate access to funds, it can push the recipient into a higher tax bracket, increasing their overall tax liability. A structured withdrawal strategy may help mitigate this impact.

Beneficiaries of inherited retirement accounts also receive a 1099-R. If the original account holder passed away, the recipient must follow specific distribution rules based on their relationship to the deceased. Spouses can roll the funds into their own retirement accounts, while non-spouse beneficiaries typically must withdraw the entire balance within ten years. These withdrawals are taxable as ordinary income, which can significantly affect tax planning.

Distribution Codes on the Form

The 1099-R includes a distribution code in Box 7, indicating the type of withdrawal. These codes determine whether additional taxes or penalties apply.

Early Distributions

An early distribution occurs when funds are withdrawn before age 59½. These withdrawals are typically coded as “1” in Box 7 and are subject to a 10% early withdrawal penalty unless an exception applies.

Exceptions include withdrawals due to permanent disability, qualified higher education expenses, or first-time home purchases (up to $10,000 from an IRA). Additionally, distributions made as part of a series of substantially equal periodic payments (SEPPs) are exempt from the penalty. Even if the penalty is waived, the withdrawn amount is still taxable.

For example, if someone under 59½ withdraws $20,000 from a 401(k) without an exception, they would owe both ordinary income tax and a $2,000 penalty. Proper planning, such as rolling over funds to another retirement account or using penalty-free exceptions, can help minimize tax consequences.

Disability Distributions

Distributions due to a qualifying disability are coded as “3” in Box 7. Under IRS rules, a disability must prevent an individual from engaging in substantial gainful activity and be expected to last indefinitely or result in death. These distributions are exempt from the 10% early withdrawal penalty but remain taxable as income.

The IRS may require documentation, such as a determination from the Social Security Administration or a physician’s statement. If the IRS later finds the disability does not meet its definition, the 10% penalty could be retroactively applied.

For example, if a 50-year-old withdraws $30,000 from a 401(k) due to a permanent disability, they would report the amount as taxable income but would not owe the additional $3,000 penalty. Keeping proper documentation helps avoid disputes with the IRS.

Rollover Distributions

A rollover transfers funds from one retirement account to another, typically to maintain tax-deferred status. These distributions are coded as “G” if they are direct rollovers between qualified plans, such as from a 401(k) to an IRA, and are not subject to taxation.

For indirect rollovers, where the account holder receives the funds before depositing them into another retirement account, the IRS requires the full amount to be redeposited within 60 days to avoid taxation. Plan administrators withhold 20% for federal taxes, meaning the individual must use other funds to complete the full rollover. If only the net amount is redeposited, the withheld portion is treated as a taxable distribution.

For instance, if someone withdraws $50,000 from a 401(k) and receives $40,000 after 20% withholding, they must deposit the full $50,000 into another retirement account within 60 days to avoid taxes. If only $40,000 is rolled over, the remaining $10,000 is considered taxable.

Tax Withholding and Potential Penalties

When a distribution is taken from a retirement account, a portion may be withheld for federal and state income taxes. The IRS generally requires a 20% withholding on distributions from employer-sponsored plans, such as 401(k)s, unless the funds are directly rolled over to another qualified account. For IRAs, withholding is optional, though account holders can elect to have taxes withheld.

If withholding is insufficient, the IRS may assess an underpayment penalty. Taxpayers are expected to pay at least 90% of their current year’s tax liability or 100% of the prior year’s liability (110% for higher-income individuals) to avoid penalties. Those who receive large distributions and do not adjust their estimated tax payments accordingly may face unexpected charges when filing.

State tax withholding rules vary. Some states require mandatory withholding on retirement distributions, while others allow recipients to opt out. For example, California mandates a 10% state withholding on early distributions from employer-sponsored plans unless the taxpayer elects otherwise, while states like Texas and Florida do not impose state income tax, eliminating the need for withholding.

Improper distributions can also result in penalties. If a taxpayer fails to follow holding period rules for Roth IRA qualified distributions, earnings on the withdrawal may become taxable, and an additional 10% penalty could apply.

Rollover Considerations

Moving retirement funds between accounts can preserve tax advantages but requires careful handling to avoid unexpected liabilities. The type of account receiving the rollover matters, as transfers between pre-tax and Roth accounts trigger immediate taxation. Converting a traditional 401(k) to a Roth IRA adds the transferred amount to taxable income for the year, potentially increasing the tax burden.

The timing of a rollover also affects tax planning. Performing a rollover in a lower-income year may reduce the overall tax burden, particularly for Roth conversions. Delaying a rollover until after a market downturn could allow assets to recover within the new account, maximizing long-term growth.

Reporting the Form

Once a 1099-R is received, the information must be accurately reported on the tax return. The taxable portion of the distribution is entered on Form 1040, Line 4b for IRAs or Line 5b for pensions and annuities. If the distribution includes both taxable and non-taxable amounts, such as after-tax contributions in a 401(k), only the taxable portion should be reported. Box 2a of the 1099-R specifies this amount. If left blank, the taxpayer may need to calculate it using IRS guidelines.

If a rollover was completed, it should still be reported even if it is not taxable. The gross distribution amount from Box 1 is entered on the appropriate 1040 line, but the taxable amount is listed as zero, with “Rollover” written next to it. Failure to report a rollover correctly may trigger an IRS notice, as the agency cross-references 1099-R forms with tax returns. If federal income tax was withheld, as indicated in Box 4, this amount should be claimed as a credit on Form 1040, Line 25b.