Early Distribution from Retirement Account

[CMA1965]

I received an early distribution from a 457 retirement account.  I used the money for medical expenses, so Turbo Tax said I didn't owe any taxes on the distribution.  However, as soon as I entered the info from my 1099-R form, the amount of federal tax I owed increased by $2700.  Why is this?

[MaryK4 · Accepted solution]

You must still pay the income tax, but the medical expenses exempts you from paying the additional taxes for early withdrawal (10%).

[dmertz]

Your Form 1099-R presumably has code 2 in box 7 to indicate that this distribution from the 457(b) plans is not subject to any early-distribution penalty and that's what TurboTax was referring to as an "additional tax."  Except for distributions of amounts attributable to funds rolled into a 457(b) plan from a non-457(b) retirement account, distributions from a 457(b) are not subject to early-distribution penalties no matter what you do with the money.

[SLYKTAX]

Does anyone know why my tax return said I have a $14 Tax on early Distribution?

We are not under 59 1/2.  My wife and I are both over 71 and we will be 72 at the end of the year.  In 2020 , we both made ROTH contribution but withdrew them in 2021 because of our AGI exceeded the limit.  We received our 1099R for the withdrawals.  Thanks

[dmertz]

@SLYKTAX  This would only happen if the Form 1099-R had code 1 or code J included in box 7 of a Form 1099-R that had a taxable amount of approximately $140.  In either case you can claim an Other reason exception to the penalty on the roughly $140.

What appears to be the case here is with a code JP or J8 Form 1099-R for a return of contribution from a Roth IRA.  In this case the code J is needed to indicate that it's from a Roth IRA rather than the individual being under age 59½ and those over age 59½ must use the Other reason exception to eliminate the penalty on the taxable earnings that accompanied the returned contribution.

[SLYKTAX]

Thanks dmertz: What happen is I used the codes provided by Schwab for all our 2021 1099-Rs. 

We have 5 copies of 1099-R.  The 1st is an IRA conversion to ROTH with Code 7 and IRA/SEP BOX checked. The  2nd is for my 2021 ROTH return,  tax amount is 0 as I loss money on it and the code is 8J.  The 3rd is my 2020 ROTH contribution return with Taxable  amount (Box 2a) $ 546.15 as as my 2020 contribution had gain.  The 4th & 5th were my wife's.  She made $7,000 for  2020 ROTH but $2,000 were done in January 2021 for her 2020's ROTH.  Both her contribution had gains.  Her (4th 1099-R) is the $5,000's gained of $368.42 (Box 2a), Box 1 is $7,368.42 and the code was PJ. The 5th 1099-R was for her $2,000 gain.  Box 1 is $163.78 and Box 2a is 139.21, the code is 8J.

So how can I do the OTHER reason in Turbo tax to eliminate the $14 tax penalty? Thanks again!

[dmertz]

Only the code 8J Forms 1099-R go on your 2021 tax return.  To claim the penalty exception, go to Other Tax Situations -> Extra tax on early retirement withdrawals, then in the Another reason box enter the $139.21 amount from box 2a of your wife's code 8J Form 1099-R.  Your 2021 tax return will include Form 5329 Part I to claim the code 12 exception to the penalty.

The code PJ 2021 Forms 1099-R must be reported on your 2020 tax return if you have not already done so to include the taxable amount in your 2020 income.  You'll similarly need to claim  on your 2020 tax return the same exception for your $546.15 taxable gains, eliminating a $55 penalty, and separately for your wife's $7,368.42 gain, eliminating a $737 penalty.  Your 2020 tax return will include a Form 5329 Part I to claim the code 12 exception to the penalty for you and another Form 5329 Part I claiming this exception for your wife.

[SLYKTAX]

Thanks you dmertz!

[SLYKTAX]

I followed up with helps in this forum that I need to claim back my early distribution penalty as my wife and I  wasn't under 59 1/2 last year.  For amending my 2020's, I need to use the 2020 TuboTax  and not the 2021 Turbotax right?  And then working for my  2021 tax,  I would have to transferred from the amended form right?

If my refund was small, I can just disregard the amendment, correct?

Thanks

[dmertz]

If you received a 2021 Form 1099-R that includes code P in box 7 and there is a taxable amount shown in box 2a, that taxable amount goes on the 2020 tax return.  If not already reported, you would do that by amending the 2020 tax return.  If the amount is small enough that it doesn't require any significant amount of tax due with the amendment, a failure to amend might be ignored by the IRS.

[SLYKTAX]

If I have to amend my 2020 for some refund, will that impact my 2021 tax filing date? OR, Do I have to wait for IRS to accept my amendment before I can file my 2021Tax return?  Thanks

[dmertz]

It doesn't affect your 2021 filing.

[SLYKTAX]

dmertz: Thanks for your professional knowledge. Appreciate all the information given. Thanks again.