CA "Early Distribution" on Form 3805P for IRA to HSA rollover.

[jdxray]

I did a one time IRA to HSA rollover in 2024 when I was 62 (and spouse 61). I understand that the $8750 is taxable income to CA, but it is also subject to a 2.5% tax on line 4 of Form 3805P as an "early distribution". The $8750 is already included as income on the CA additions column of Schedule CA(540). So how does one deal with this? This is not an early withdrawal as we are over 59.5. There was a similar question in 2022 and 2023 but no answer to this part of the question. There is no way I can find to fix this in TT. I have box 7 checked on my 1099-R, and no other entries on form 3805P.  Thanks for any help.

[BillM223 · Accepted solution]

I made a test with distribution code of '7' on the 1099-R (normal). and it also came up with penalty, I don't know why. No matter, we will work around it.

When you go through your CA state interview, you should eventually come to a screen like this:

As you can see, TurboTax in CA thinks this is an early distribution (Hmmn, I guess I should check the age of the taxpayer in my test). No matter. First of all, check that "My Distributions Are Not Subject to Additional Tax." That alone should be enough to remove that line 4 entry on the 3805P.

If it is not, then enter the amount as distributions not subject to additional tax, and put in an exception number. Use 99.

If anyone at the FTB wonders about this, just tell them the truth - you obviously did not make an early distribution, and you had to enter this to get around a tax software issue. 

[jdxray]

Thank you so much! But I don't get the screen you screenshotted. Here is what I see.

So I don't get the dialogue you show. I can add it directly to the form on line 2 smart worksheet as non-simple distributions and then it goes away, but have to use code 99 as a get around.

Thanks again.

[jdxray]

Well perhaps this is the answer- from 3805P Instructions:

"Effective for taxable years beginning on or after January 1, 2007, the IRS allows a one-time rollover from an IRA to an HSA. California does not conform to this provision. Under California law any distribution from an IRA to an HSA must be added to adjusted gross income (AGI) on the taxpayer’s California return and would be subject to a 2½% additional tax under the rules for premature distributions under IRC Section 72."

But "would be" seems to mean if under 59.5, so Turbotax still hasn't fixed this despite multiple posts from multiple years. So  the work around for me is to go to Form 3805P in the Forms mode and add 8750 to the non-simple box in the smart worksheet for line 2 and use 99 as the exception since non of the others are appropriate. It does not offer me an option in the interview mode in Mac version.