The funds saved for retirement will be treated uniquely upon withdrawal. If you are nearing, or are in retirement, it is critical that you understand how your retirement nest egg will be treated from a tax perspective.

Retirement Income- 1099R

Income received will be reported on form 1099R for distributions from pensions, annuities, qualified retirement plans, profit sharing programs, IRAs and some insurance contracts. Form 1099R will report the taxable amount of income from each of these distributions.

If the income was from an account fully funded by your employer or if you funded the account using pre-tax dollars, distributions will be fully taxable. If you funded these accounts using after-tax funds, distributions could be treated either on a partially taxable or tax-free basis, depending upon the nature of the account.

IRAs and Roth IRAs

If you have a rollover IRA, or have funded a Traditional IRA for retirement purposes, keep in mind that you must start making withdrawals beginning no later than when you reach the age of 70 ½. Distributions from a Traditional IRA are treated as ordinary income. Once you reach the age of 70 ½, you will be unable to make further contributions into the account.

Roth IRAs are a newer form of retirement savings program. Funds are saved into a Roth IRA on an after tax basis, grow tax free and if the funds are withdrawn under the stated account requirements, they are treated on a tax-free basis. Roth IRAs do not have the same withdrawal requirement at the age of 70 ½. In fact, funds can remain in the account indefinitely if the account holder wishes. In addition, funds can be contributed to the account throughout the holder’s lifetime.

Understanding the basic retirement account types as well as how income generated from these accounts will be treated, will not only ensure you enjoy your retirement, but that you understand how to properly manage your annual income taxes during the process.



Ray is an ex-financial adviser and the founder of Financial Highway. Currently working in the financial industry and working towards completing his Chartered Financial Analyst, CFA, designation.