On my 1099r I have a 1M in box 7 what does that mean?

[JohnW15 · Accepted solution]

"1" indicates an early distribution, with no known exception (in most cases, under age 59½).  "M" indicates a Qualified plan loan offset.

[dmertz]

The code M for an offset distribution means that you have until this due date of your tax return, including extensions, to come up with some or all of the money to roll the distribution over to a traditional IRA (or a qualified retirement plan).  Whatever amount you rollover is an amount on which you will continue to defer taxes and avoid the early-distribution penalty.  Whatever amount you are unable to roll over by the deadline remains distributed and subject to early-distribution penalty.

[mrshah]

@dmertz If you put money into a traditional IRA to do this offset and it's post tax dollars (i.e. the situation is trying to offset a 401K loan distribution which was used on the down payment of a home but then switched jobs) then wouldn't you get taxed a second time when your retire and take out the funds? 

[dmertz]

By completing the rollover of the code M distribution you make the code M distribution nontaxable.  You are completing the rollover with the pre-tax dollars that you were originally loaned, not with after-tax money.

[mrshah]

@dmertz Okay that makes sense - so then several companies on the market (Schwab, Etrade, Fidelity) have both Traditional IRAs and Rollover IRAs, does it matter which one you open to do the offset? 

[mrshah]

Also, I imagine you could fund the IRA with more than the yearly limits up to the loan amount. Fore example a $10K loan distribution would allow you to fund the IRA with $10K even though the contribution limit is $6K for this year. 

[dmertz]

There is no longer any real difference between a "rollover" IRA and a traditional IRA that is not labeled as a "rollover" IRA; it's been many years since there was any such difference.  Rollover IRAs were used to show that the money originally came to the IRA from an employer's qualified retirement plan like a 401(k) and was eligible to be rolled back into an employer's qualified retirement plan, but there is no longer any real restriction that funds eligible for rollover to an employer's qualified retirement account can only come from such a specially designated IRA.  However, employer plans can still impose their own restrictions on what rollovers they will accept, so if you are opening a new traditional IRA to receive this rollover it probably makes sense to open it as a "rollover" IRA in case you ever want to do a rollover to an employer's plan that has antiquated restrictions.

Rollover contributions are not subject to the annual limits for new regular IRA contributions.  The amount permitted to be rolled over by the deadline is limited only by the gross amount of the distribution (box 1 of the Form 1099-R).

[mrshah]

Thanks for your help thus far! Last 2 questions... Does the rollover IRA need to be opened in 2019 (so today) or does that matter as long as the funds are deposited by the tax deadline of April or October depending on an extension. And are there limits on the number of deposits? Can I deposit $8k in February and the last $2k in August for example?

[dmertz]

The deadline for rolling over a code-M distribution is the due date of the tax return, including extensions, not the usual 60-day deadline to complete an indirect rollover.

There is no limit on the number of deposits to complete the rollover, only a limit on the total amount.  There is also no limit on the number of different IRA accounts receiving the deposits, although there is generally no reason to use more than one.  You can deposit $8,000 in February and, if you timely request a filing extension (Form 4868), you can contribute deposit $2,000 in August as long as the gross amount of your code-M distribution was at least $10,000.  Any portion of the code-M distribution that remains undeposited by the deadline will remain a taxable distribution and, if box 7 of the Form 1099-R also includes code 1, subject to a 10% early-distribution penalty on the taxable amount.

[Camillejackson]

I recieved 2 1099R forms the first one has a 1in box 7 the second has a 1M .. do I need to put both of these into turbo tax? When I tried there was no option in the drop down menu for1M

[dmertz]

Both must be entered.  Codes 1 and M are separate codes in the same box 7 and each code must be selected separately in the two box-7 drop-down boxes of TurboTax's 1099-R form.

The code 1 on each of the forms indicates that each of these distributions is subject to a 10% early-distribution penalty unless rolled over to another retirement account or you have a penalty exception that applies.  The deadline for rolling over the distribution reported with only code 1 was 60-days after the date of that distribution.  Should you be able to come up with the money to do so, the deadline for rolling over the offset distribution reported on the Form 1099-R that includes code M in box 7 is the due date of your tax return, including extensions, for the year of the distribution.

[marvahb]

Thank you