Deferring income is a traditional tax-saving strategy, but a recent IRS ruling clarified that not cashing a pension plan distribution check doesn’t count.
If your pension plan sends you a check for a distribution, the IRS Revenue Ruling 2019-19 states that you owe tax on the amount for the tax year in which the plan distributed the amount. ‘money, even if you don’t receive your check or cash it until the following year. The plan sponsor must file a Form 1099-R, declaring the distribution and any withholdings, in the same year the money is distributed.
The ruling makes it clear that you can’t delay paying taxes by taking a distribution at the end of the year, then keeping the check and cashing it in January or beyond the following year, explains the IRA expert Ed Slott. “Even if you think you can carry it over for another year, it’s still taxable for the year it’s taken out of your plan,” he says.
The IRS probably received enough questions about the timing to issue such a broad rule, Slott says. Some businesses keep checks received for services for up to a subsequent calendar year and record the money as income at that time, and individual taxpayers may have assumed the same practice was permitted for distribution checks from pension plans. retirement.
Although the ruling only refers to 401 (k) plans and other tax-eligible plans, Slott says the same treatment already applies to IRA distributions.
One way to avoid the problem entirely: Consider using direct deposit if your custodian offers it. That could eliminate any potential problems, Slott says, because the check would be considered cashed immediately.
But the plans are not required to offer a direct deposit option and some plans will only process distributions by check, said Jeffrey Levine, managing director of BluePrint Wealth Alliance, in Garden City, NY.
The check may be lost or forgotten, or a recipient may not have the mental capacity to remember having requested delivery. “It would be great if the money went straight from Account A to Account B,” says Levine, but that’s not always possible.