retirement

IRS: Uncashed Payout Checks From Retirement Plans Are Still Taxable

You owe tax on a 401(k) or IRA distribution for the tax year in which the money was paid out, even if you don't cash the check until the following year.

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.

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.

Most Popular

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
May 4, 2021
Are You Still Chasing the Almighty Dollar, Even Though You Have Plenty to Retire?
retirement

Are You Still Chasing the Almighty Dollar, Even Though You Have Plenty to Retire?

In our experience, many have saved enough money to retire comfortably. Yet too many worry about their money running out and want more. Maybe it’s tim…
May 6, 2021
9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)
tax deadline

9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)

Between due dates for extension requests, IRA or HSA contributions, and other deadlines, there's more to do by May 17 than just filing your federal in…
May 4, 2021

Recommended

9 Reasons to File a Tax Return Even If You Don't Have To (Hint: They're Due Soon!)
tax filing

9 Reasons to File a Tax Return Even If You Don't Have To (Hint: They're Due Soon!)

Although you might not be required to file a tax return, it might be wise to file one anyway. Here are a few reasons why.
May 7, 2021
33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
May 6, 2021
Taxes, Taxes and More Taxes
tax planning

Taxes, Taxes and More Taxes

In light of the recent proposals by President Biden and Sens. Bernie Sanders and Chris Van Hollen, here’s what could be coming and some ideas on how t…
May 4, 2021
9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)
tax deadline

9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)

Between due dates for extension requests, IRA or HSA contributions, and other deadlines, there's more to do by May 17 than just filing your federal in…
May 4, 2021