Why Did I Get a 1099? Here's What to Do With It
Types of 1099 Forms for Mutual Funds and Retirement Accounts
What is a 1099 form and why do investors receive them? Do 1099s need to be filed with the IRS? There are several types of Form 1099 but the most common are 1099-R and 1099-DIV. It's important for investors to understand the basics on these tax forms and how to file them properly.
What Are 1099-R Forms?
1099-R forms are a type of form 1099 used for reporting distributions from a retirement or tax-deferred account, such as an IRA, 401(k) or annuity, during the tax year. 1099-R forms are sent to investors by the custodian or investment company where the investments are held. These may include mutual fund companies or discount brokers.
Investors receive form 1099-R when there is any form of distribution from a retirement account. The reason this confuses most people is because a distribution, by definition, does not necessarily mean a cash withdrawal. A common form of distribution is a direct rollover, where a person transfers their 401(k), for example, directly to an IRA. Although a direct rollover does not generally trigger a taxable event, it is still a distribution type that must be reported to the IRS.
What Are 1099-DIV Forms?
1099-DIV forms are used to report dividends or capital gains distributed to the investor during the tax year. Where most confusion arises with the receipt of 1099-DIV is when the investor did not knowingly receive any dividends or place any trades in their account(s) that may have triggered capital gains.
If you hold mutual funds in a taxable account, such as an individual brokerage account, the mutual fund itself may have capital gains from the sale of stock held within the fund. These mutual fund capital gain distributions are passed along to the investor. Often, dividends and capital gains are reinvested into the mutual fund so these taxable events are not noticed by the investor... until the 1099-DIV arrives.
If an investor holds mutual funds in a tax-deferred account, such as an IRA, 401(k) or annuity, dividends and capital gains are not currently taxable to the investor and therefore no 1099-DIV is received.
Tip For Minimizing Taxes on Investments
Investors should be aware of how various mutual funds are taxed and practice wise asset location, which is the placement of funds in certain accounts to minimize taxes. For example, investors may not want to hold a dividend-paying mutual fund in a taxable account (unless the investor wants income) because these funds generate taxes. Instead the investor could place this fund in their IRA to avoid current taxation and grow the fund faster by virtue of compounding interest.
What to Do With a 1099 Form
1099-R and 1099-DIV are primarily for documentation (to support your tax filing in the event of audit). Generally, the IRS is also sent a copy of the 1099 directly from the investment company where you hold your investments. Therefore, the various types of form 1099 are for the taxpayer's records, in the event of audit in the future.
1099 forms, such as 1099-R and 1099-DIV are primarily used for tax-reporting purposes. The receipt of these forms does not always mean that taxes are owed. Investors are wise to discuss the purpose and filing of 1099's with a tax specialist or by reviewing source information at IRS.gov.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.