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Old 04-04-2013, 06:12 PM
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1099-R and 5329 Form questions

Hello friends,

I have a question in regards to 1099-R forms. Say I have a 401k, I roll it to a IRA, then take out a loan from it and then pay it back within it the appropriate time frame.

Come tax season I get a 1099-R for the rollover, which shows no taxable income, that is fine. But then I get another 1099-R for the loan showing the loan amount as taxable amount under box 2a, box 2b showing a check under taxable distribution amt not determined, and box 7 showing the code 1.

As far as I am concern, I should not have received a 1099-R form for the loan since I paid it back on time, so I called them and they told me that the 5498 form that comes out showing the offsetting distribution comes out in May 2013 and that they recommend me filling the 1099-R with a 5329 form explaining that I properly returned the loan in the appropriate timeframe, along with the statement reflecting it (they sent me the statement that shows that I have paid the loan back)

My questions would be how to fill out the form 5329 so that they do not charge any taxes on this loan?

Thanks



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Old 04-05-2013, 08:24 AM
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“Say I have a 401k, I roll it to a IRA, then take out a loan from it and then pay it back within it the appropriate time frame.”========Correct. Unlike other retirement accounts such as a 401k account, you cannot take a loan from your IRA. However, there is a way to take money out of your IRA on a short-term basis without incurring any penalties, which can amount to a short-term loan; using an IRA as security for a loan or borrowing from it is a Prohibited Transaction. If you engage in a prohibited transaction, including taking a loan from your IRA, the IRS will disallow the IRA status of the account as of the first day of the year in which the prohibited transaction occurred. In other words, the IRS will consider your IRA as completely distributed as of the first of the year, resulting in ordinary income tax on the entire balance of the account. If you are under the age of 59 1/2, you will also owe an additional 10 percent penalty for an early withdrawal of your IRA funds. Since you can’t do an IRA loan, you’d have to try an alternative. You may be able to tap IRA assets using a 60 day rollover. You have to follow some strict IRS rules, but this technique can act like a short term IRA loan.You can only do this once a year.

“Come tax season I get a 1099-R for the rollover, which shows no taxable income, that is fine. But then I get another 1099-R for the loan showing the loan amount as taxable amount under box 2a, box 2b showing a check under taxable distribution amt not determined, and box 7 showing the code 1.”=====You must file form 5329 when receiving an early distribution and distribution code "1" is not shown in box 7 of form 1099-R. This also applies to individuals who meet the exception to tax on early distribution and code "1" is shown in box 7 of form 1099-R or if box 7 of form 1099-R does not indicate an exception, or the exception does not apply to the entire distribution.


“As far as I am concern, I should not have received a 1099-R form for the loan since I paid it back on time, so I called them and they told me that the 5498 form that comes out showing the offsetting distribution comes out in May 2013 and that they recommend me filling the 1099-R with a 5329 form explaining that I properly returned the loan in the appropriate timeframe, along with the statement reflecting it (they sent me the statement that shows that I have paid the loan back)”========= Form 5498 is an annual document issued by a financial institution to report information about your retirement accounts and other tax-preferred savings accounts. Form 5498 is filed with the IRS and a copy is also sent to you who owns the account. Essentially, Form 5498 reports various types of account information, such as ;whether the account holder must begin taking an required minimum distributions for the year;it is important to note that it is not necessary to use form 5329 if distribution code "1" is correctly shown in box 7 of 1099-R form and the individual owes the tax amount shown on the 1099-R form.



“My questions would be how to fill out the form 5329 so that they do not charge any taxes on this loan?”======== Form 5329 is used to report any additional income tax or excise tax (such as the 10% penalty on early distributions) you may owe in connection with IRA. You must report the entire amount of any IRA withdrawal on line 15a of your Form 1040 for the year of the withdrawal. If you then redeposit the amount tax-free, you enter a taxable amount of zero on line 15b. Write Rollover next to line 15b. Now the IRS has been properly notified about your tax-free short-term IRA loan deal. If you believe you need to use IRS form 5329 it may be wise to seek competent tax advice. The consequences of improperly reporting early distributions from qualified retirement plans can be as exceedingly costly, as IRS language on early retirement distributions can be confusing. To avoid the penalty for improper reporting, it is strongly recommended that the taxpayer consult with a competent tax adviser if there are any uncertainties regarding the reporting of early retirement distributions.



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