From: Knoxville, TN

Dear TaxMama,

My husband changed jobs this year and received an early distribution of a 401K--about 10,000.  We did not rollover, but used the money to pay for college tuition for one of six children.

The distribution company didn't take out any taxes. We planned on paying them.  The 1099-R shows no taxable income and lists it as a "G" in box 7. [That's the code for a rollover.]

What should we do with this?

Do we need to contact the company and ask for a new 1099R, or can we just correct the numbers ourselves?

Thank you.

Mary

 

Hi Mary,

If the code is wrong and you'd planned to pay the taxes anyway, just correct it on your tax return.

Trying to get the investment house to issue a new 1099 is harder than giving birth. Trust me. And the contractions are more painful.

If you need to use 401K money for tuition again, move the money to an IRA first. THEN draw the money for education. The first $10,000 won't be subject to the 10% early withdrawal penalty.

You'll still pay tax, but...not the penalty.

That doesn't work if you take the money from a 401K

I hope this helps?

Best wishes,
Eva Rosenberg, MBA, EA

Mary is still distressed...

Thanks.  My husband did call yesterday and they denied distributing the check to us.  If we report something other than what they put on the 1099, does that open us up for an audit?

Is it safer to just use the 1099 and pay the taxes if they audit us later?  We are pretty confused about this.

Thanks.
Mary

 

Dear Mary

What an amusing dilemma.

This will test your ethics.

According to the 1099-R, the funds were rolled over and you never got it. That is the only report IRS will ever get, unless they audit the financial institution.

So, if you report it as a non-taxable distribution (rollover code), you won't get into trouble.

If you are ever audited for that year by some random chance....you will be faced with additional taxes - but probably no  penalties because you didn't know any better.

On the other hand, you KNOW you got the money. That's hard to forget. So you'll have to decide how to report it.  And no, reporting it as taxable won't cause you to get audited.

So (don't tell me), this will be a good test of your and your husband's ethical level. It will be a good time to learn about yourself and each other.

Have fun working this out.

Best wishes,

Eva Rosenberg, MBA, EA
http://www.TaxMama.com

 

Mary admits...

What a mess!! Thanks for the info. I think our ethics are too high to be able to enjoy this one.

Mary