Can I roll a 401K early early distribution taken in 2018 into an IRA to avoid taxes and penalties. The 1099-R box 7 code is 1M.

[MichaelL1]

code 1 is early distribution
Code M is Qualified plan loan offset.

[MichaelL1]

Plan loan offsets.
If a participant's accrued benefit is
reduced (offset) to repay a loan, the amount of the
account balance that is offset against the loan is an actual
distribution. Report it as you would any other actual
distribution. Do not enter Code L in box 7.
A qualified plan loan offset amount is the amount that a
participant's account balance is reduced to repay the
outstanding amount of a plan loan. In order to be a
qualified plan loan offset, the loan, at the time of the offset,
must be a loan in good standing and the offset must be
solely by reason of (1) the termination of the qualified
employer plan or (2) the failure to meet the repayment
terms because the employee had a severance from
employment. Report a qualified plan loan offset as you
would any other actual distribution. In addition, enter code M in box 7.

[macuser_22 · Accepted solution]

Code M extends the normal 60 day rollover time window to the due date of the tax return, or extended due date (Oct 15) if a timely extension is filed, to replace the money from other funds into a Traditional IRA and report the 1099-R code M as a rollover.

[slvrspur12]

I was severed from my employment after taking the loan. Can I deposit the loan amount into a new IRA today to avoid the early withdrawal penalty and taxes?  Pardon my ignorance.

[macuser_22]

Yes.   Any time up to April 15 (due date) or Oct 15 (extended due date if an extension is filed).

Be sure to tell the IRA custodian that it is a 1099-R code M rollover so that they will report it as a rollover and not a contribution.

For reference see: IRS Pub 590A
<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p590a#en_US_2018_publink1000230578">https://www.irs.gov/publication...>

"What's New for 2018

Extended rollover period for qualified plan loan offsets in 2018 or later. For distributions made in tax years beginning after December 31, 2017, you have until the due date (including extensions) for your tax return for the tax year in which the offset occurs to roll over a qualified plan loan offset amount. For more information, see Time Limit for Making a Rollover Contribution in chapter 1."

A code M is a qualified plan loan offset.

[slvrspur12]

Thank-you. How do I report the rollover in TurboTax software to avoid the penalty and taxes that result from a code 1M entry?

[macuser_22]

Enter a 1099-R  here:

Federal Taxes,
Wages & Income
I’ll choose what I work on (if that screen comes up),
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

OR  Use the "Tools" menu  (if online version under My Account) and then "Search Topics" for "1099-R" which will take you to the same place.

Be sure to choose which spouse the 1099-R is for if this is a joint tax return.
Be sure to pick the correct 1099-R type:  Standard 1099-R, CSA-1099-R, CSF-1099-R, RRB-1099-R.

If this was a  rollover or conversion, answer the question that you moved the money to another retirement account (can be the same account).  The screen will open up with choices of where it was moved.

[NOTE:  When you get to the "Your 1099-R Entries" screen where you can add another 1099-R, use "continue" to keep going as there are additional interview questions after that screen in most cases.  You can always return as shown above.]

It will show as income on the summary screen which shows gross income, not taxable income.
 
The income will be reported on line 4a on the 1040 form with the word “ROLLOVER” next to it if it was a rollover.

The taxable amount will go on line 4b.  In the case of a rollover, that amount will be zero.

[slvrspur12]

I thank all for their input. Very helpful. I wish that I used this feature in the past. You guys are great.