IRAs Explained

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.

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

If the IRA/SEP/SIMPLE box is checked on the tax return, the income will be shown on Form 1040 Line 4a (IRA distributions).

When a 1099-R is used to report a distribution from a Pension or Annuity, the IRA/SEP/SIMPLE box will not be checked.

If the IRA/SEP/SIMPLE box is not checked on the tax return, the income will be shown on Form 1040 Line 4c (Pensions and annuities).


What do the acronyms, IRA / SEP / SIMPLE, 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 contributions are made with pre-tax money, distributions (including growth) 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. Since contributions are made with money that has already been taxed, and growth is tax-free by law, retirement distributions are not taxed.

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. Since contributions are made with pre-tax money, distributions (including growth) are treated as taxable 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. Since contributions are made with pre-tax money, distributions (including growth) are treated as taxable income.


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.