Deferring income is a traditional tax-saving strategy, but a recent IRS ruling clarifies that not cashing a retirement plan distribution check doesn’t count.
If your retirement plan sends you a check for a distribution, the IRS’s Revenue Ruling 2019-19 spells out that you owe tax on the amount for the tax year in which the plan distributed the 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, reporting the distribution and any withholding, in the same year the money is distributed.
The ruling makes it clear that you can’t hold off on paying taxes by taking a distribution at the end of the year, then holding on to the check and cashing it in January or beyond of the following year, says IRA expert Ed Slott. “Even though you may think you can defer until another year, it’s still taxable for the year it came out of your plan,” he says.
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The IRS most likely received enough questions on the timing to issue such a broad rule, Slott says. Some businesses hold on to checks received for services until a subsequent calendar year and record the money as income then, and individual taxpayers may have assumed the same practice was allowable for retirement plan distribution checks.
Although the ruling only refers to 401(k) plans and other tax-qualified plans, Slott says the same treatment already applies to IRA distributions as well.
One way to avoid the issue altogether: Consider using direct deposit if your custodian offers it. That could eliminate any potential problems, Slott says, because the check would be deemed immediately cashed.
But plans aren’t required to offer a direct deposit option and some plans will only process distributions by check, says Jeffrey Levine, chief executive officer of BluePrint Wealth Alliance, in Garden City, N.Y.
The check can get lost or forgotten, or a recipient may not have the mental capacity to remember requesting the distribution. “It would be great to have the money move right from account A to account B,” Levine says, but that isn’t always possible.
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