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

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 25 Cheapest U.S. Cities to Live In
places to live

The 25 Cheapest U.S. Cities to Live In

Take a look at our list of American cities with the lowest costs of living. Is one of the cheapest cities in the U.S. right for you?
October 13, 2021
15 U.S. Cities With the Highest Average Home Prices
real estate

15 U.S. Cities With the Highest Average Home Prices

Home prices have rocketed higher across most of the country, but housing costs are acutely painful in these 15 U.S. cities.
October 20, 2021

Recommended

Boost Your Retirement Savings for 2022
Financial Planning

Boost Your Retirement Savings for 2022

If you were self-employed or had a side hustle in 2021, you can save even more in a tax-advantaged account.
October 26, 2021
Don't Get Too Hung Up on a Retirement Savings Number
retirement planning

Don't Get Too Hung Up on a Retirement Savings Number

There's tons of advice about how big your nest egg should be for retirement but focusing too much on a single figure can lead to complacency.
October 26, 2021
The Best Fidelity Funds for 401(k) Retirement Savers
Investing for Income

The Best Fidelity Funds for 401(k) Retirement Savers

Fidelity funds are renowned for their managers' stock-picking prowess. We rate Fidelity's best actively managed funds that are popular in 401(k) plans…
October 25, 2021
From EBRI's CEO: What's on Retirees' Minds
Empty Nesters

From EBRI's CEO: What's on Retirees' Minds

Retirees feel more comfortable spending from steady sources of income rather than tapping their nest egg.
October 25, 2021