Form 5329 Question

[MsTabbyKats]

Taxpayer is in 30's

 

Took loan from retirement fund of $25,000 (code 1) for medical bills

This is taxable

AGI is $90,000

Form 5329

Line 1-$25,000

Subtract $9,000

Line 2-$16,000 (not subject to penalty)

Line 3-$9000 (amount subject to the 10% penalty)

Line 4-$900 penalty

 

Is the above all correct...distribution is taxable...but only $9000 is subject to penalty?

 

Thanks

[Jack from Ohio]

If it was a loan, none is taxable.

[MsTabbyKats]

Hmmmm...that's what I was thinking...but I was going by the coding. (And suppose he doesn't pay it back?)

 

Is there a place to indicate this?   Something on 5329?  Code 12 (other)?  and then take out the entire distribution?

 

Or, should I change the Code to 2 on the 1099-Rs?

 

He had 3 distributions...two were coded 1....and the third was coded 2.

[Gail in Virginia]

Did he by any chance terminate his employment with the company that the retirement plan was with?  Generally, if the participant is no longer employed, the loan is treated as a distribution.

[MsTabbyKats]

Did he by any chance terminate his employment with the company that the retirement plan was with?  Generally, if the participant is no longer employed, the loan is treated as a distribution.

I doubt it...since he didn't mention it.  But I'll ask.

[Lynn EA USTCP in Louisiana]

If he took a 'loan' no 1099-R should have been issued, unless as stated above he terminated his employment with the company afterwards and did not repay the 'loan'.

 

If he took an early hardship withdrawal from the 401K then the 1099R is most likely correct. 

 

Ask to review his paperwork on this.

[MsTabbyKats]

I just asked him to call the companies...and go over this.

 

They are loans...and he is repaying.

[MsTabbyKats]

So....the client said that he was told it would be taxable...so...back to my original question....was I doing it correctly?

 

I guess a loan is not always a loan.......

[Lion EA]

The loans have a time limit, probably 5 years unless for a mortgage, so did he exceed the loan period?  CompanIES?  Is he currently working for more than one company?

[Jack from Ohio]

Something does not seem to fit....  Loans are not taxable unless NOT repaid.  Loans do not generate 1099-R.  1099-R being issued indicates a distribution and not a loan.

 

Sumpin jus ain rite...

[jklcpa]

So....the client said that he was told it would be taxable...so...back to my original question....was I doing it correctly?

 

 

 

Instructions for 5329, line 2 - for the exception # 05 :

Qualified retirement plan distributions up to the amount you paid for unreimbursed medical expenses during the year minus 10% (or 7.5% if you or your spouse were born before January 2, 1950) of your adjusted gross income (AGI) for the year.

 

Yes, $16,000 you entered on line 2 was after this limitation.

Yes, the part that is subject to the penalty is $9,000.

 

 

 

I guess a loan is not always a loan.......

 

Correct. If the loan from a 401(k) exceeds 50% of the nonforfeitable balance in the retirement account, the loan can create taxable income under §1.72(p)-1. 

 

You can see some of that discussion in my post #10 from >this topic.

 

See this page at IRS re: statutory maximums of loans and here is a whole Q&A section from Cornell Univ Law School online library on the topic of loans treated as distributions.

Edited February 19, 2015 by jklcpa
added links

[MsTabbyKats]

Thanks...

 

Unlike the typical client..when I told him loans were not taxable...he said he knew he had to pay.

 

If he's OK with it...I'm OK with it.

[Cathy]

Tabby,

 

When you have multiple distributions from the same payer and such as your client's case, 2 are coded 1 and the other is coded 2, I  have seen the following occurring in the same year:

 

    A distribution(s) taken before the age of 59 1/2 receives the code of 1, then a later distribution that year (after the taxpayer turns 59 1/2), the code is 2, because an exception applies to the withdrawal.  You might want to check your client's date of birth and see if it fits.

 

    Also, it sounds like your client sees it as a "loan" from his retirement account...when in actuality, it's a withdrawal, plain and simple.

 

 

Cathy