I am filing a 1099-R with code M1 for early distribution under the age of 59. Used money for down payment of house. I quit the job. How do I avoid taxes for this?

[dmertz]

The only way to avoid taxes and early-distribution penalty on this money is to come up with the money and roll it over to a traditional IRA or to a traditional account in another qualified retirement plan.  The code M indicates that you have until the due date of your 2018 tax return, including extensions, to roll over as much as you are able.  Whatever amount you are unable to roll over will be subject to ordinary income tax and early-distribution penalty on your 2018 tax return.

[fredplaza]

I am also filing a 1099-R with code M1. My employer allowed me to take a loan off my 401K. I switched jobs before the loan was paid off. The 401K company repaid the loan with money in the 401K fund. I thought the deadline was Dec 31 2018, but you are saying if I come up with the loan balance before April 15, 2019, I won't get taxed?

[dmertz]

Yes, if you come up with the money and roll amount of the offset distribution over to a traditional IRA, you'll continue to defer this income.  If you request a filing extension for your 2018 tax return, you'll have until October 15, 2019 to complete the rollover.  No reason not to request the filing extension.

[fredplaza]

I left my job in Sept 2018. The deadline from the 401K company to repay the loan off the 401k ended in December 2018. You are saying this deadline doesn't matter for tax purposes?

[dmertz]

You paid off the loan with an offset distribution in December, effectively a distribution paid to you that is immediately turned around to pay off the loan, so the loan is done.  What you are permitted to do is roll over an amount equal to the amount of the offset distribution and you have until the due date of your 2018 tax return, including extensions, to complete the rollover if you can come up with the money.  That's what the code M means.  You'll need to tell the IRA custodian that it's a rollover of an offset distribution because the IRA custodian needs to report it with code PO in box 13c of the 2019 Form 5498 from this IRA.