1099-R's Ins and Outs

[moppet2003]

DH and I took a loan against his 401K in 1999 for a down payment on our house and last February we were notified his company was switching to a new benefits company so if we didn't repay the rest of the loan by end of April 2009, they would issue a 1099-R this year.

We got it in the mail last week and I sent a simple letter requesting the name and address of the original creditor and an amortization schedule from origination and all money paid into loan and how payments were allocated.

Do they have to send me anything verifying this or do we have to take it at face value what they say is taxable income?

When we were notified last April about this I had asked over the phone for an amortization and they sent records from 2006 to present, so I'm thinking they don't have all of the records. Any input would be appreciated. Thanks.

[jq26]

This really isn't you against the 401k administrator, but it is the IRS vs. you.

So a couple of things here:

- You are the creditor and the borrower. You borrowed from YOU w/ interest. So I am really unclear as to why you want them to give you the name of an original creditor. You know the creditor's name, address, telephone #, etc. It is your own.

- The amortization schedule is fixed from day one. just plug into bankrate the length of the loan and the agreed upon interest rate that you agreed to pay yourself back at. There is only one way to amortize a fixed rate loan. You don't need to take their word for it. You have access to it.

- The unpaid remaining principal on the loan becomes a taxable distribution for 2009. You must pay tax on the amount at your marginal rate + 10%. It is usually quite a nasty bill (can exceed 40% easily when you factor in state taxes).

- Ordinarily, I would say avoid this at all costs (maybe take a 401k LOAN on new 401k and pay off old 401k loan if possible) but the time for that has come and gone.

[Bigwoodystyl]

I think maybe you can save the 10% early withdrawal penalty if you incurred any expenses in 2009 which meet the standards for exception in IRS Publication 560. It's likely the only exception you might qualify for would be if you or one of your dependents incurred significant medical expenses in 2009 [or if one of you became disabled]...


In any event, you report this tax to the IRS on Form 5329

Form 5329
Instructions Form 5329



Free advice and worth every penny...

[moppet2003]

Thanks for the publications info and I have already spoken to an IRS agent and was told there was a law passed last year that allows us not having to pay the 10% penalty because of all the meltdowns going on.

Guess I'll have to find our paperwork and plug the amounts into bankrate and see what comes up- thanks jq26.

And then I'll see if they send anything back to us.

[jq26]

Originally Posted by Bigwoodystyl

In any event, you report this tax to the IRS on Form 5329.

Actually, if the 1099-R is correct and you owe the tax, just report on Form 1040, line 58.

I'd like to know what this law is....news to me that taxable distributions are not taxable. That would be a gaping tax loophole. People would defer income, then borrow it from retirement, then not pay it back. You'd be allowing an end run around the taxation system.

Edited to add that 401k distributions are taxable and penalized if you are younger than 59 and 1/2. If you are older than 59 and 1/2, then they are merely taxable.

[moppet2003]

If I remember the conversation correctly, the 10% penalty forgiveness is only going to be effective for 2009 1099 issues because so many people tapped their 401k's to stay afloat. But of course I need to speak to the IRS about that again and will update when I know something.

[Bigwoodystyl]

Originally Posted by jq26

Actually, if the 1099-R is correct and you owe the tax, just report on Form 1040, line 58.

I stand corrected. I hate the tax code. It's so.... lilliputian.

If s/he could come up with the cash, couldn't the OP still roll it over to a Traditional IRA and count it as a 2009 contribution before April 15 of this year, or no? [That would be ideal. It would save the taxes and rebuild the retirement account at the same time. W00t!]

[Bigwoodystyl]

Originally Posted by moppet2003

If I remember the conversation correctly, the 10% penalty forgiveness is only going to be effective for 2009 1099 issues because so many people tapped their 401k's to stay afloat. But of course I need to speak to the IRS about that again and will update when I know something.

I think if that were true it would have been mentioned in Publication 560. I think you got some misinformation.

[jq26]

Originally Posted by Bigwoodystyl

I stand corrected. I hate the tax code. It's so.... lilliputian.

If s/he could come up with the cash, couldn't the OP still roll it over to a Traditional IRA and count it as a 2009 contribution before April 15 of this year, or no? [That would be ideal. It would save the taxes and rebuild the retirement account at the same time. W00t!]

It depends if the recipient still works there. To my knowledge, you can't rollover 401k funds into an IRA unless you no longer are employed by that employer. Not particularly my area of expertise though so I suggest the OP check.

Depnding on the size of the 1099-R, you may want to discuss this with a good accountant or an enrolled agent. They may have a creative way to save you a few bucks.