A 1099-R distribution code 4 in Box 7 means the payment came out of a retirement account, pension, annuity, or insurance contract because the original owner died. The code tells the IRS the money is going to a beneficiary, estate, or trust, and it exempts the distribution from the 10% early withdrawal penalty that normally applies before age 59½.1Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions The money may still be taxable as ordinary income; the code addresses the penalty, not the tax.
Because Code 4 itself signals the exception, you do not have to file Form 5329 to claim the penalty waiver. The code does that work for you. It applies regardless of the deceased person’s age and regardless of your age as the recipient.2Internal Revenue Service. Instructions for Forms 1099-R and 5498 (2025)
Combination Codes You Might See
Payers sometimes pair Code 4 with a second letter. The two common combinations:
- Code 4G — the death distribution was directly rolled over into another eligible retirement plan or IRA. Generally not taxable in the year received.
- Code 4H — a direct rollover from a designated Roth account to a Roth IRA.3Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498
If you see either of these, the payer is telling the IRS the funds moved trustee-to-trustee into another qualifying account, so the distribution should not create a taxable event this year.
How Much of It Is Taxable
Code 4 explains why the money left the account. What you owe depends on what kind of account it came from. Box 1 of the 1099-R shows the gross distribution; Box 2a shows the taxable portion.2Internal Revenue Service. Instructions for Forms 1099-R and 5498 (2025)
Traditional IRAs, 401(k)s, and Other Pre-Tax Plans
Distributions from inherited pre-tax accounts are taxed as ordinary income to the beneficiary. The original owner deducted the contributions going in, so tax comes due on the way out. Box 2a usually equals Box 1. The exception is if the deceased made nondeductible contributions; in that case, Box 2a should show only the taxable portion, with the nontaxable amount reflected in Box 5.
Inherited Roth IRAs
Inherited Roth IRAs are generally tax-free. Contributions come out tax-free because the original owner already paid income tax on them. Earnings are also tax-free as long as the Roth had been open for at least five tax years, counted from January 1 of the year the original owner made their first Roth contribution.4Internal Revenue Service. Retirement Topics – Beneficiary If the account was open less than five years at the owner’s death, only the earnings are taxable. The five-year clock does not restart when you inherit.
Non-Qualified Annuities
Code 4 also shows up on death benefits from non-qualified annuities purchased with after-tax money. The gain above the original owner’s investment is taxable to the beneficiary as ordinary income, and gains come out first. If you annuitize the proceeds over your life expectancy, the exclusion ratio spreads the gain across payments so each one is part tax-free return of investment and part taxable gain. A lump sum pulls all the gain into a single tax year.
Reporting Code 4 on Your Return
Inherited IRA distributions go on Form 1040 Lines 4a (gross) and 4b (taxable). Inherited distributions from 401(k)s, 403(b)s, pensions, and annuities go on Lines 5a and 5b.5Internal Revenue Service. 1040 (2025) If the full amount is taxable, you can skip the gross line and enter the number only on the taxable line.
Any federal tax withheld shows in Box 4 of the 1099-R; claim it on Line 25b as a payment already made. The default withholding on nonperiodic IRA distributions is 10%, which you can adjust or opt out of by filing Form W-4R with the payer. Eligible rollover distributions from employer plans carry a 20% mandatory withholding unless you elected a direct rollover.6Internal Revenue Service. Pensions and Annuity Withholding For a large inherited distribution, that default rate often undertaxes what you actually owe. If the distribution pushes you into a higher bracket, consider quarterly estimated payments to avoid an underpayment penalty.
What You Can Do With the Money
Code 4 opens up options that depend heavily on whether you were the deceased’s spouse.
Surviving Spouses
A surviving spouse has the widest set of choices. You can roll the inherited account into your own IRA, which makes it your account for all purposes going forward. Your own RMD schedule then governs, so distributions do not have to start until age 73, or age 75 if you were born in 1960 or later.7Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs The catch: if you are under 59½ and later pull money out of the rolled-over account, the 10% early withdrawal penalty applies because the funds are no longer in an inherited account.
Keeping the account titled as an inherited IRA preserves the penalty exemption at any age, which matters if you are under 59½ and might need the funds. You can delay distributions until the year the deceased spouse would have turned 72, and once you pass 59½ yourself, you can roll the balance into your own IRA at that point.4Internal Revenue Service. Retirement Topics – Beneficiary
Non-Spouse Beneficiaries
Everyone else has narrower options. The inherited funds must sit in an account properly titled as an inherited IRA or inherited 401(k) in the deceased owner’s name for your benefit. You cannot roll them into an IRA of your own, and the 60-day rollover route is off limits. Only a trustee-to-trustee transfer into a properly titled inherited account works. Titling matters: the account should read something like “John Smith, deceased, IRA for benefit of Jane Smith, beneficiary.” Retitling it under just the beneficiary’s name causes the IRS to treat the whole balance as a taxable distribution that year.
The 10-Year Rule
Most non-spouse beneficiaries who inherited after December 31, 2019, must empty the account by December 31 of the tenth year following the year of death.7Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs A 2024 death means everything out by the end of 2034. Within that window, you choose the timing of withdrawals. Spreading them roughly evenly usually holds down the tax hit compared to a single lump sum in year ten.
The Annual RMD Trap Inside the 10-Year Window
Here is where beneficiaries get caught. If the original owner died on or after their required beginning date (meaning they had already started their own RMDs), you must take annual minimum distributions in years one through nine of the ten-year window, then clear whatever is left by the end of year ten.8Internal Revenue Service. Notice 2024-35, Certain Required Minimum Distributions for 2024 If the owner died before their required beginning date, no annual distributions are required within the ten years; you just need the balance to zero by the deadline.
The IRS waived the penalty for missed annual RMDs from 2021 through 2024 while the final regulations were pending. That waiver has not been extended. Starting in 2025, confirm whether annual RMDs apply to your inherited account and take them. A missed RMD triggers a 25% excise tax on the amount you should have withdrawn, dropping to 10% if you correct the shortfall within two years and file an amended Form 5329.7Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
Beneficiaries Who Can Still Stretch
Five categories of beneficiary can take distributions over their own life expectancy instead of following the ten-year rule: the surviving spouse; a minor child of the account owner (until age 21, when the ten-year rule kicks in); a disabled individual under IRC Section 72(m)(7); a chronically ill individual certified by a licensed health care practitioner; and any person not more than ten years younger than the deceased.4Internal Revenue Service. Retirement Topics – Beneficiary The minor-child exception covers the owner’s own children, not grandchildren, nieces, or nephews.
If the Code on Your Form Is Wrong
If the payer used Code 1 (early distribution) or Code 7 (normal distribution) when Code 4 should have applied, the mistake can generate an unwarranted 10% penalty assessment. Contact the payer first and ask for a corrected 1099-R.9Internal Revenue Service. Topic No. 154, Form W-2 and Form 1099-R (What to Do if Incorrect or Not Received)
If a corrected form hasn’t arrived by the end of February, call the IRS at 800-829-1040. The IRS will contact the payer and send you Form 4852, a substitute for the 1099-R.10Internal Revenue Service. Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R On Form 4852, enter the correct distribution code and explain how you determined it, such as by attaching a copy of the death certificate. If a corrected 1099-R arrives later and the numbers differ, file Form 1040-X to amend.
Two Boundaries Worth Knowing
State income tax rules are separate. Most states tax inherited retirement distributions as ordinary income, though several offer partial exemptions for retirement income and eight have no individual income tax at all. Check your state before deciding how to time distributions.
If the deceased’s estate paid federal estate tax, you may qualify for an income tax deduction under IRC Section 691(c) for the portion of estate tax attributable to the retirement account.11Office of the Law Revision Counsel. 26 USC 691 – Recipients of Income in Respect of Decedents It is claimed as an itemized deduction on Schedule A and is not subject to the 2% AGI floor. The math is intricate enough that most beneficiaries entitled to it work with a tax professional, but it can meaningfully reduce the income tax on inherited distributions.