Understanding Code G on Form 1099-R — What It Really Means

💡 Understanding Code G on Form 1099-R — What It Really Means

As a tax preparer, I often notice clients getting confused about Code G on their Form 1099-R.
Many assume that if a dollar amount appears on the form, it automatically means tax is due.

“This is income — so I’ll have to pay tax on the whole amount.”

Not necessarily! In fact, Code G is usually a good sign.
It often indicates a tax-free transaction, if handled correctly.

🏦 Example: A $1 Million 401(k) Rollover

Let’s say someone retires with $1,000,000 in their 401(k). They have three choices for moving that money:

1️⃣ Direct Rollover to a Traditional IRA (Tax-Free)

If the full $1 million is rolled directly into a Traditional IRA, there’s no tax and no penalty.

• Box 1 (Gross Distribution): $1,000,000

• Box 2a (Taxable Amount): $0

• Box 7: Code G – Direct Rollover

Because the funds moved from one qualified account to another, it’s not taxable.

2️⃣ Cashing Out (Taxable)

If the person takes the money in cash, the entire $1 million becomes taxable as ordinary income.
If they’re under age 59½, they’ll also face a 10% early withdrawal penalty.
💸 A large portion of their retirement savings could go to taxes and penalties.

3️⃣ Converting to a Roth IRA (Roth Conversion)

If the $1 million is rolled into a Roth IRA, it becomes fully taxable that year —
but future growth and qualified withdrawals will be 100% tax-free.

🔍 Key Takeaway

Form 1099-R reports money movement, not always taxable income.
When you see Code G, it often means the funds were rolled over — not withdrawn.
Handled correctly, it can mean zero tax owed today and smarter tax-free growth for the future.