Why Did You Get a 1099-R From Principal Life Insurance?

If you received a 1099-R from Principal Life Insurance, it means Principal paid out $10 or more during the year from a retirement plan, annuity contract, or cash-value life insurance policy you own, and it reported that payment to both you and the IRS.¹ Receiving the form does not automatically mean you owe tax. It means a reportable transaction occurred, and the numbers inside the boxes tell you how much of it, if any, is taxable.

What the Distribution Was Actually For

Principal administers 401(k)s, 403(b)s, pensions, IRAs, individual and group annuities, and permanent life insurance policies with cash value. A 1099-R can come from any of them. The reason matters, because the tax treatment is very different depending on the product.

A Retirement Plan or IRA Distribution

If your employer uses Principal for a 401(k), 403(b), or pension, any withdrawal, rollover, hardship distribution, or required minimum distribution generates the form. Pre-tax account money is fully taxable as ordinary income when it comes out. A qualified Roth 401(k) distribution is tax-free, but Principal still reports the gross amount on the 1099-R and shows zero in the taxable-amount box.

A Non-Qualified Annuity Withdrawal

Non-qualified annuities are purchased with after-tax dollars, so your premiums have already been taxed. That does not make withdrawals tax-free. Federal law applies an earnings-first ordering rule to withdrawals taken before annuity payments begin: every dollar you pull out is treated as taxable gain until you have withdrawn all the earnings in the contract, and only then do you start recovering your original premiums tax-free.² This surprises people who assume they are just getting their own money back.

On a full surrender, the taxable amount is total cash received minus total premiums paid. On annuitized periodic payments, Principal uses an exclusion ratio to split each payment into a tax-free portion and a taxable portion.³ Either way, the taxable piece lands in Box 2a.

A Cash-Value Life Insurance Withdrawal or Surrender

Whole life and universal life policies build cash value. If you surrender or partially withdraw from one, you owe tax only on the amount that exceeds your cost basis, which is roughly total premiums paid minus any prior tax-free withdrawals or dividends received.⁴ The ordering rule for a non-MEC life insurance policy runs the opposite direction from a non-qualified annuity: basis comes out first, so withdrawals are tax-free until you have pulled out every dollar of premium.

Policy loans are not themselves taxable while the policy stays in force. The trap is a lapse or surrender while a loan is outstanding. When that happens the loan balance is treated as a distribution, and any amount above your remaining basis becomes taxable income even though no check ever arrived.² The tax bill shows up with no cash behind it.

One further wrinkle: a life insurance policy funded too heavily in its first seven years is reclassified as a modified endowment contract.⁵ A MEC follows the same earnings-first rule as a non-qualified annuity, and distributions before age 59½ carry a 10% penalty on the taxable portion. If your 1099-R from Principal shows taxable income from a life insurance policy you did not expect to produce any, MEC classification is a likely explanation.

The Boxes That Decide What You Owe

The form has roughly two dozen boxes. Five of them drive the tax outcome.

Box 1 — Gross Distribution. The total paid out during the year. This figure mixes any tax-free return of your basis with any taxable gain. It is a starting point, not the amount you owe tax on.
Box 2a — Taxable Amount. The portion that counts as taxable income. If Principal has complete premium records, this number reflects the gain. If it does not, Box 2b (“Taxable amount not determined”) is checked or Box 2a is blank, and calculating the taxable amount is your job.¹
Box 4 — Federal Income Tax Withheld. What Principal already sent to the IRS on your behalf. It credits against your tax when you file, the same way paycheck withholding does.
Box 7 — Distribution Code. A one- or two-character code telling the IRS why the distribution happened and whether the early-withdrawal penalty applies. More than any other box, this one sets the final tax treatment.
Boxes 14 and 15 — State Tax Information. Box 14 shows state tax withheld; Box 15 identifies the state. You will need both for your state return.⁶

What the Code in Box 7 Means

The Box 7 code is the IRS’s shorthand for how to tax you. The ones you are most likely to see from Principal:

Code 7, Normal Distribution. You took money out at or after age 59½. The taxable amount in Box 2a is ordinary income, with no 10% penalty.¹
Code 1, Early Distribution, No Known Exception. You were under 59½ and Principal did not identify an exception. The taxable amount is hit with ordinary income tax plus a 10% additional tax.⁷
Code 4, Death. Paid to a beneficiary after the account holder or policyholder died. Life insurance death benefits are generally excluded from gross income. Inherited annuity distributions are taxable to the beneficiary, on the gain for a non-qualified contract or the full amount for a pre-tax qualified contract.⁸
Code 6, Section 1035 Exchange. Principal moved the value of your old contract into a new insurance or annuity contract tax-free. Box 2a should be zero.⁶
Code D, Non-Qualified Annuity or Life Insurance Distribution. Flags the distribution as potentially subject to the 3.8% net investment income tax. It usually appears alongside another code and shows up often on Principal 1099-Rs because many of its products are non-qualified contracts.⁶
Code W, Cost of Life Insurance in a Qualified Plan. Reports the economic value of life insurance coverage inside your employer plan. It appears in Box 2a as taxable income even though no cash was paid.¹

If Box 7 Shows Code 1 but You Think an Exception Applies

The exceptions to the 10% penalty depend on what kind of account the money came from. For qualified retirement plans and IRAs, they include disability, substantially equal periodic payments, separation from service after age 55 (employer plans, not IRAs), and qualified higher education expenses (IRAs only).⁹

For non-qualified annuities the list is narrower. The Section 72(q) penalty is waived for distributions after age 59½, after death, on account of disability, as part of substantially equal periodic payments, or from contracts with pre-August 1982 investment.² Higher education and medical expenses are not exceptions for non-qualified annuities. Assuming the retirement-plan exceptions carry over is a common mistake.

To claim an exception, file Form 5329 with your return and enter the applicable exception number. If Code 1 is correctly shown and you owe the full penalty with no exception to claim, you can skip Form 5329 and report the penalty directly on Schedule 2 of Form 1040.¹⁰

When Box 1 Has a Number but Box 2a Is Zero

If you swapped one Principal policy or annuity for another, or moved to a different carrier, without taking cash, the transaction may qualify as a tax-free Section 1035 exchange. The IRS permits life-for-life, life-for-annuity, and annuity-for-annuity exchanges. Annuity-for-life is not permitted.

A properly processed exchange shows the full contract value in Box 1, zero in Box 2a, and Code 6 in Box 7.⁶ Your original cost basis carries into the new contract. If a 1099-R shows a taxable amount on what you understood to be a 1035 exchange, call Principal. Either the exchange was not processed as tax-free, or cash came out alongside the transfer.

Putting the Numbers on Your 1040

Where the numbers go depends on the source. IRA distributions go on Lines 4a (gross) and 4b (taxable). Pension, annuity, and life insurance distributions go on Lines 5a (gross) and 5b (taxable).¹¹ Federal income tax withheld in Box 4 gets entered in the payments section, reducing what you owe or increasing your refund.

If Box 2a shows a dollar amount, transfer it directly to the taxable line. If Box 2a is blank or Box 2b is checked, calculate the taxable portion yourself using your contract records: annual statements showing premiums paid, dividends received, and prior withdrawals. Reporting the entire Box 1 figure as taxable when you have recoverable basis means overpaying, and the IRS will not fix the mistake for you. Keep the original contract documents and every annual statement.

Even a Code 6 exchange with no taxable income belongs on the return. Enter Box 1 on Line 5a and zero on Line 5b. Leaving it off can trigger an IRS notice, because the agency has the 1099-R in its system and expects a matching entry.

If the Form Is Wrong or Never Shows Up

Principal has to mail your 1099-R by January 31 following the year of the distribution.¹² If you took a distribution and the form has not arrived by mid-February, or the numbers look wrong, start with Principal’s customer service line and ask for a corrected form. The errors that show up most often are incorrect basis in Box 2a, which happens frequently on policies that have been in force for decades, and the wrong distribution code in Box 7.

If Principal does not respond or refuses to correct the form by the end of February, call the IRS at 800-829-1040. The IRS will contact Principal directly and request the missing or corrected form.¹³ Have your Social Security number, Principal’s name and address, and the distribution details ready when you call.

If the filing deadline is close and you still do not have a correct form, file using Form 4852 as a substitute for the 1099-R, estimating the distribution amount and taxable portion from your own records.¹³ If a corrected form arrives later and the numbers differ, amend the return with Form 1040-X.

1
Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
2
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
3
Internal Revenue Service. Publication 939 (12/2025), General Rule for Pensions and Annuities
4
Internal Revenue Service. For Senior Taxpayers 1
5
Office of the Law Revision Counsel. 26 USC 7702A – Modified Endowment Contract Defined
6
Internal Revenue Service. Instructions for Forms 1099-R and 5498
7
Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs
8
Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits
9
Internal Revenue Service. Topic No. 558, Additional Tax on Early Distributions From Retirement Plans Other Than IRAs
10
Internal Revenue Service. Instructions for Form 5329 (2025)
11
Internal Revenue Service. Instructions for Form 1040 and 1040-SR
12
Internal Revenue Service. Publication 1099 General Instructions for Certain Information Returns (For Use in Preparing 2026 Returns)
13
Internal Revenue Service. What to Do When a W-2 or Form 1099 Is Missing or Incorrect