Should I request a corrected 1099-R with a code M1. I quit my job but I paid off the loan. What should I do about the penalty?

[dmertz · Accepted solution]

The code M1 indicates that your loan was paid off with an offset distribution from the retirement plan, effectively a distribution from the plan paid to you that was immediately turned around to pay off the loan.  As such, the distribution is subject to tax and to an early-distribution penalty unless an amount equal to the offset distribution is rolled over to another qualified retirement account like an IRA.

The code M indicates that you have until the due date of your 2018 tax return, including extensions, to come up with the money to roll the offset distribution over to another qualified retirement account.  Doing so will allow you to continue to defer taxes on this money and to avoid the 10% early-distribution penalty.  Any amount not rolled over is taxable income on Form 1040 line 4b and is subject to an early-distribution penalty reported on Schedule 4 line 59.

[HelpwithIRA]

Hi, just looking for some additional information here.  Would I be able to re-file my 2018 taxes and pay this balance to a qualified account in 2020, and then be able to cancel the penalty I owe?  Or am I too late?

Thanks!

[dmertz]

It too late to roll over a 2018 offset distribution.  The deadline for rolling over a 2018 offset distribution was October 15, 2019.

[HelpwithIRA]

Thank you for the fast reply!  So do I have any options besides paying the tax penalty?

[dmertz]

There is no avoiding the penalty unless you have an exception that applies to distributions from qualified retirement plans:

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distri...

The penalty should have already been included on your 2018 tax return.