IRAs Explained

Form 1099-R Box 7, has a check box for IRA/SEP/SIMPLE.

What do those acronyms mean, and why is it important to have the box marked correctly?

The following information is based on an INVESTOPEDIA web page.

IRAs (IRA = Individual Retirement Account)
An individual retirement account is an investing tool used by individuals to earn and earmark funds for retirement savings. There are several types of IRAs as of 2018: Traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. Sometimes referred to as Individual Retirement Arrangements, IRAs can consist of a range of financial products such as stocks, bonds, or mutual funds.

Traditional and Roth IRAs are established by individual taxpayers, while SEP and SIMPLE IRAs are retirement plans established by small business owners and self-employed individuals.

Traditional IRA contributions are tax-deductible. Since the contributions reduce the taxpayer's AGI (and that is how they are not taxed), they are often referred to as pre-tax dollars. Since this money has not been taxed, distributions are treated as taxable income.

Roth IRA contributions are not tax-deductible. However, eligible distributions are tax-free. This means you contribute to a Roth IRA with after-tax dollars, but as the account grows you do not face any taxes on capital gains. When you retire, you can withdraw from the account without incurring any income taxes on your withdrawals.

SEP IRAs (SEP = Simplified Employee Pension)
Self-employed individuals, such as independent contractors, freelancers and small business owners, can set up SEP IRAs. If a business owner sets up a SEP IRA for his employees, he can deduct the contributions from his reported business income and potentially secure a lower tax rate on his business income. However, employees are not allowed to contribute to their accounts, and when they make withdraws from their accounts during retirement, the withdrawals are taxed as income.

SIMPLE IRAs (SIMPLE = Savings Incentive Match PLan for Employees)
SIMPLE IRAs are also for small businesses and self-employed individuals. However, unlike SEP IRAs, SIMPLE IRAs allow employees to make contributions to their accounts, and the employer is required to make contributions. All contributions are tax deductible.

IRA Type Who can open & invest? Tax-exempt contributions? Tax-exempt distributions?
Traditional Individual taxpayers Yes No
Roth Individual taxpayers No Yes (including growth)
SEP Small business owners and self-employed individuals [1] Yes [1] No
SIMPLE Small business owners and self-employed individuals [2] Yes [2] No

[1] Small business employees are not allowed to make contributions.

[2] Small business employees are allowed to make contributions.

When a 1099-R is used to report a distribution from an IRA (as identified above), the IRA/SEP/SIMPLE box will be checked.

When entering retirement income on a tax return, make sure the IRA/SEP/SIMPLE box is checked (or not checked) as shown on the 1099-R so the income will be allocated correctly on Form 1040.

  • If the IRA/SEP/SIMPLE box is checked, the income will be shown on Form 1040 Line 15.
  • If the IRA/SEP/SIMPLE box is not checked, the income will be shown on Form 1040 Line 16.