1099-R coding for death distributions

[FundeK]

When paying out non-spousal beneficiaries, is a code of "4" always used on the 1099-R? (401(k)/profit sharing plan)

I know that when a lump sum payment is issued, code "4" is used, but I am unsure how to code the 1099-R when the non-spousal elects the life expectancy option. I would assume it should be the same code, but you know what assuming gets you.

It seems odd that you could have a 35 year old beneficiary receiving payments for 35+ years coded as a death distribution.

[Appleby]

It should be Code-4. Code 4 helps to denote the amount as ' not subject to the 10-percent additional tax'

[FundeK]

What about a code 7? Does anyone use a code 7 for the LE distributions?

[Appleby]

Code 7 is used only if the recipient is the owner of the retirement account, and is at least age 59 ½ when the distribution occurs

See Page 9 to 10 of the instructions at http://www.irs.gov/pub/irs-pdf/i1099r.pdf

[FundeK]

I guess that is where the debate is. Does the beneficiary become the "owner" of the account? Ever?

What would happen if it was mistakenly reported as a code 7 when it should have been a 4. Would you go back and correct it if it was a year or two ago?

[Appleby]

For retirement plan purposes, being the owner generally means being to make contributions to the account and not being required to take distributions except for RMDs that begin at age 70 ½. Only a spouse beneficiary can ever become the owner of the assets by electing the treat as own option…even then, that option applies only to IRAs.

IMO, the decision to correct or not correct the form by changing the code from 7 to 4 would depend on how easy it is to file the corrected return and/or whether the customer/beneficiary mind keeping the Form with the code 7 given that there are really no adverse consequences from leaving it as-is. Changing the Code to 7 will just let the IRS know that the recipient is a beneficiary of the account-not the owner…however, assuming the name on the 1099-R is correct (name of deceased and beneficiary-designating beneficiary as such) that would have already been made obvious (to the IRS).