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I don't think this is true. Under "What you need to get started" on the IRS's Free File information page [1]:

> Forms 1099-DIV and Forms 1099-R, showing dividends and distributions from retirement and other plans paid to you during the year

Note that there is a difference between a tax product's freemium tier (where they can upsell) and their Free File product (where they cannot). A big part of the problem here is that these companies do their best to make you conflate the two — and then hide the second one, so they can upsell unsuspecting taxpayers who don't know the difference.

[1] https://www.irs.gov/e-file-providers/what-you-need-to-get-st...

Yeah, I think GP was fooled by TurboTax.

See this twitter thread from ProPublica where you can't proceed in two scenarios without an upsell...because you aren't actually on the Free File page: https://twitter.com/propublica/status/1120404531433672705

I'm confused. Income in an IRA isn't taxed, so that's not relevant for taxes. If you had post-tax investments then yes it's more complicated, but that has nothing to do with IRA/401k retirement savings?

I assume they meant a Roth IRA, which does tax deposits.

Growth/income in the Roth IRA is also tax-free (there'd be no point in the Roth otherwise).

I may have mispoke. In addition to a Roth IRA, I also had a traditional brokerage account. It's my understanding even if you invest in index funds/ETFs, some of the stocks in the funds generate dividends and those can be taxable even if there's no capital gains tax on the growth in value of the index fund/ETF.

Anyways, whether it was from the brokerage I opened or the IRA, I had a class of income that would have made me need to pay to file, even though my total income was below 65k.

Another thing was foreign taxes paid (because some funds in one of your indexes are international). But they don't let you just say "listen, I'd rather skip the credit for those two whole dollars in taxes and not pay 50 dollars to file"

That's a rather big misstatement: most lower income people (most people in general actually) won't be investing post-tax, a 1099-DIV really is quite uncommon

It's still a shitty and stupid situation... but that doesn't mean it's relevant for most free filers.

You should be able to skip the foreign tax credit if you manually enter the 1099-DIV: simply enter foreign taxes paid field on the 1099-DIV as 0, and your tax software won't offer to credit it.

Many people's companies don't offer 401ks.

The limit for IRAs is lower than that for 401ks. It is very common to open a brokerage account if you had more than 5500 you wanted to put away.

(Ex: grad student who interns in the summer, contractor with boom and bust pay cycle, or any worker in a company that doesn't offer a 401k)

>You should be able to skip the foreign tax credit if you manually enter the 1099-DIV: simply enter foreign taxes paid field on the 1099-DIV as 0, and your tax software won't offer to credit it.

I'm not sure it's legal to lie about the contents of the 1099-DIV, even if the lie is to the government's benefit :)

Am I correct in understanding that interest paid to deposits at a credit union get you a 1099-DIV? And wouldn't that mean virtually everyone who banks at a credit union would get that form? Also, anyone who owns savings bonds or CDs. Those are out of fashion these days, but many people still get them. Your point stands that these are still not the majority of the population, I just wanted to add some more pathways a person might get such a tax form.

That may have been what caused it as well. It was a while back and my memory is fuzzy.

I've since optimized my investment strategy (small amount in checking, rest in investments)

The IRS doesn't require institutions to generate 1099s for <10 dollars in interest.

>Am I correct in understanding that interest paid to deposits at a credit union get you a 1099-DIV?

No, income from interest paid on deposit accounts is reported on form 1099-INT, not 1099-DIV.

1099-DIV is for dividend income. 1099-INT for interest income. They are are reported different places on your tax form.

Nowadays most people don't get 1099-INTs from their banks or credit unions because interest rates are so low most people are making no more than $1-$2 a year in interest because rates are so low and financial institutions aren't required to issue 1099-INTs for interest income below $10. I used to get them from my credit union back in high school when rates were higher.

All it takes to generate $10 in interest is $1000 in a 1% savings account or $500 in a 2% CD. Anyone with even this small a savings will be issued a 1090-INT, no?

No because rates aren't 1-2% in a typical savings account from a standard bank. If you want 1-2% interest you'll have to have a "high interest savings account" which have historically been online-only offerings and most people really can't be bothered to open up a new account and manage multiple accounts and do the transfers.

For example, if you had $20,000 in a Chase savings account AND had a "Premier Relationship" with them then you'd get an interest rate of 0.04%, or a whopping $8 in interest for the year.

https://www.chase.com/personal/savings/interest-savings/inte...

Its worth noting that rates have gone up significantly in the last year and a half, at one point it got to the point where checking accounts and savings accounts had the same interest rates at many banks and many people stopped using savings accounts entirely at that point.

Online makes it even easier. I opened a >2.5% 12 mo CD online and it took an hour max. No pre-existing relationship with the bank.

The high yield savings accounts tend to have a few strings attached but nothing I’d consider a barrier to someone with at least a job that offers direct deposit.

The biggest barrier to getting a 1090-INT is not the bank or the APR. It is having a low income and not enough money to save.

Of course, I'm not arguing its difficult or there are any barriers, I know its easy. However, I literally can't convince a single person beyond my sister to open up a high interest savings account. People just don't want to be bothered.

Me? I currently have fifteen (15) bank accounts. Chasing those sign up bonuses.

> However, I literally can't convince a single person beyond my sister to open up a high interest savings account. People just don't want to be bothered.

High-interest savings account are crappy as investments, and I'd you have to go to a different institution (or use a CD, or both) lack the frictionless (and instant) connection to primary checking that is generally the reason to use a savings account vs. a decent investment vehicle.

I can't recommend online banking enough. Fidelity and Schwab both have excellent offerings. At least through Fidelity I can buy high interest CDs for multiple banks without having to deal with the hassle you're referring to. Free checking with refunds for any ATM fees anywhere. Easily move money from checking to investment accounts and back. Open new account online within minutes. I have a car account where I set aside money for my next car, an emergency fund, a college savings fund (529), an IRA, and others. Ten accounts in all, all under one convenient interface. They even slurp in the data from my workplace 401k at a different bank so I can track that in the same place.

Ok, the confusing bit for me is that credit union deposits are called shares and the earnings are called dividends. However, you still get a 1099-INT, I believe because these shares are not considered securities.

https://budgeting.thenest.com/report-dividends-credit-union-...

Ah, yes, I can see how that would be confusing.

I never bought into all the credit union jargon ("share," "share draft", etc.) so I forgot they pay "dividends" instead of "interest."

In short, I believe this is the way it works: because credit union members are owners of the credit union, the profit paid to members are considered dividends by dictionary definition, however, the IRS considers them interest by their rules. Just like VA disability, getting a check from the government every month is obviously income, but the IRS doesn't consider VA disability income by their rules.

Capital gains and dividends in a Roth IRA is not taxed either.

They clearly mean they ALSO had a taxable brokerage account that generated dividends; saying they contributed to an IRA was an (unintentional) misdirect.

Yes, I've been upfront about the error, acknowledged it, and I've edited the original post.

I still stand by my assessment it's not cool to nudge people not to save.

There are many people who'd like to save, but don't have 401ks. (Ex: students doing internships, contractors, or people working in the service industry)

The limit for a 401k is ~18k IIRC and ~5500 for an IRA IIRC. If you had say, 10k from a summer internship, you'd put the difference in a normal, taxable brokerage.

Having a brokerage account does not mean one is affluent.

To be pedantic, the total pre-tax 401(k) contribution limit in 2019 is $19k ($25k if you’re over 50). But the total defined contribution limit (employer+employee, including after-tax) is $56k. So if you were so inclined (and fortunate to have the income) you could sock away $56k through an employer plan, including pretax, company match, and post-tax.

IRA (traditional and Roth) contribution limit in 2019 is $6k.

Source:

https://www.irs.gov/newsroom/401k-contribution-limit-increas...

If you're self-employed (e.g. contractor) can set up a SEP-IRA and do "employer" contributions in addition to the regular "employee" IRA contribution.

Another option is a "solo" 401k account but there's more paperwork involved.

IRA/401k contributions are pre-tax and thus tax deductible, so you need to account for that deduction in the current tax year. The income produced within the IRA/401k is taxed upon withdrawal.

Roth IRA/401k are post-tax investments, and thus not tax deductible. And the income they produce within the IRA/401k is not taxed upon withdrawal.

Ergo, traditional IRAs are more complicated because you have to account for the deduction in the current year, and you have to account for income tax (as well as FICA by the way) upon withdrawal, plus there are mandatory distribution rules based on your age. The Roth IRA are less complicated, no deduction claimed therefore no deduction to prove in the current year, and no taxes to compute on withdrawal, with no mandatory distributions.

>The Roth IRA are less complicated, no deduction claimed therefore no deduction to prove in the current year...

The big exception is if you are lower income you might be eligible for the Saver’s Credit for the current tax year based on your Roth contributions.

Exactly this. Amount of income is actually quite a crappy measure for what should be free to file. If it’s flat W2 income with nothing else to consider then sure...

When you start adding in all these other little side cases you’ve blown your argument. They literally take more effort (either on your part deciphering and completing, the CPA’s part deciphering and completing, or Turbotax’s part developing and validating). Yes you made practically nothing this year but it was in incredibly uncommon ways and that makes it more complex than a simple 1040EZ.

Funding an IRA is "incredibly uncommon"?

If you’ve got only W2 income then a 401k would be much more common. A normal IRA is “common” as well, but not nearly as much so I’d argue.

As another comment pointed out it could have been a Roth IRA, which has different rules. It could also have simply been some other oddity or quirk of the tax software at the time.

None of the specifics negate anything related to complexity vs cost.

Unless you change jobs, in which case you might roll over your 401k into an IRA.

I agree, though, that this is a digression from the broader argument, which is that the lack of an easy and unqualified free option (or automatic filing) by the IRS is a particularly egregious case of regulatory capture by the tax prep industry.

My company doesn't offer a 401K, does this mean I shouldn't be allowed to file taxes for free?

You can have both an IRA and a 401(k) and contribute to both in any given tax year (up to limits set by the IRS for each individual account).

In fact, you SHOULD have both since 401(k)s are hugely inflexible compared to IRAs so it makes sense to fund an IRA before a 401(k) unless you're getting a match on the 401(k) contributions. So if you want to save 10% for retirement and you get a 5% match on your 401(k) then it usually makes most sense to put 5% in the 401(k) to get the match and 5% in the IRA for control and flexibly.

If you then want to bump up your your retirement contribution to 15% then 5% should go in the 401(k) and 10% into the IRA, staying within the legal IRA contribution limits. Once your IRA is maxed out, then the remaining should go into the 401(k) (until your 401(k) is maxed out, of course).

401(k) can also be rolled over to IRAs when you leave your employer, so even someone who only contributes to a 401(k) will usually end up with an IRA.

> In fact, you SHOULD have both since 401(k)s are hugely inflexible compared to IRAs so it makes sense to fund an IRA before a 401(k) unless you're getting a match on the 401(k) contributions.

This really depends on how good your 401(k) is and what kind of investments you want to make. If you just want the standard (and very good) low-cost three-fund portfolio, all 401(k) programs I’ve seen offer these kinds of index funds. If you really want more exotic investments, then an IRA might be better.

The advise to have both is sound though, but the best reason is you want to maximize your tax-advantaged savings. “Flexibility” is a benefit not important to everyone.

>This really depends on how good your 401(k) is and what kind of investments you want to make.

I disagree because 401(k)s can change on a whim though... My company decided to change literally all of our fund options overnight, and we couldn't keep what we already invested in the old funds, we just had to buy into the new funds. So even if your 401k is awesome today, it might not be awesome tomorrow. If your IRA provider decides to change their fund offerings, you can just move to a different one.

Luckily our new funds had perfectly fine choices, but that might not have been the case.

>If you just want the standard (and very good) low-cost three-fund portfolio, all 401(k) programs I’ve seen offer these kinds of index funds.

Honestly, both our original and current 401(k) options didn't/don't have a good international fund, the ones they had had very high expenses (over 1%)

There's also no low cost REIT index on my 401(k) (however, REIT isn't part of the 3-fund profolio)

The poster miswrote. It wasn't an IRA, but a regular investment account that generated taxable dividends. Much less common.

A 1098 caused me to have to pay turbotax 70 bucks. Instead of doing that, I just switched to H&R block which remained free shrug

>IMHO it's not cool to nudge low income people to not save for retirement.

It's not cool to NOT nudge low income people to save.