Tax Issue From Setting Up Wife’s 72t

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L1: Tax Issue From Setting Up Wife’s 72tThis is not a specific 72t question, but the issue comes from setting up wife’s 72t in 2008.She rolled over her company pension and part of her 401k money directly into her IRA. However, in her 401k she had $41,620 of after-tax money that she took as a distribution(she was 52 in 2008). When I input her 1099 info into TurboTax we went from a refund of $2000 to owing $6500. Her 1099 was coded a 1 in Box 7 and I now think we are getting hit with a 20% tax because she was not59 1/2. Does this sound correct?2009-02-10 02:35, By: retiredbob, IP: []
L2: Tax Issue From Setting Up Wife’s 72tHello retiredbob:I suspect that you have not yet completed the Turbotax interview. TT deals with 72(t) distributions in two parts. The 1st part is up in the income section where it asks if you have recieved any 1099R’s and you input that document including the rfason code in box 7. Then, about an hour or so later in the taxes section up comes a screen that inforems you that you currently owe the 10% surtax and then permits you to input the amounts of distributions that should be excluded form the 10% surtax by reason of… education, 1st home purchase, disability, SEPP plan, etc. remembering that a taxpayer may have several reasons. This causes Turbotax to both remove the 10% surtax in the amounts indicated and also produce as many 5329’s as needed.See if this is the case. If not, post a reply until we get it right.TheBadgerwjstecker@wispertel.net2009-02-10 02:59, By: TheBadger, IP: []

L2: Tax Issue From Setting Up Wife’s 72tYou may also have an issue with the entry of the 401k distribution. If I understand your post correctly, she did not roll the after tax amount of 41,620 over to an IRA, and therefore received a separate 1099R for it showing -0- in Box 2a. This should obviously be tax and penalty free. There would also be a 1099R coded “G” for a direct rollover of the pre tax money to the traditional IRA account. Both amounts end up on line 16a of Form 1040, but -0- shows on 16b with “rollover” entered next to 16b.Once the rollover and after tax amounts are entered, you can deal with the 1099 R that reports distributions FROM the IRA under the 72t plan. These should be fully taxable unless your wife ever made non deductible IRA contributions or rolled over after tax amounts to her IRA. If this was done, there should be a Form 8606 to report it, and an 8606 would also be attached to the current return calculating the amount of the 72t distribution that was tax free. Distributions from the IRA are reported on lines 15a and 15b of Form 1040, and as The Badger indicated, she will also need a 5329 to report the 72t exception to the penalty (Code 02).2009-02-10 03:20, By: Alan S., IP: []

L3: Tax Issue From Setting Up Wife’s 72tAlan I appreciate your reply but I am a little confused. She did receive a 1099 from the custodian of her 401k for the after-tax money that was distributed to her directly. Box 2a on the 1099 had a taxable amount of $408.40. Box 5 had an amount of approx $41K for employee contribution. Again, Box 7 had a Distribution Code of 1(early distribution, no known exception). I assume she is gettint hit with the 10% penalty for getting a distribution prior to age 59 1/2? None of the $41,620 ever madeit into her 72t plan.Her 1099 for her 72t distributions are correct and Coded as 2. Also, her 1099 for the 401lk and pension rollover to her IRA are correct. Again, I think my only issue is with her 1099 for the 401k after-tax distribution. I can not find on any tax form if we were hit with a 10% penalty on the $41,620 after-tax distribution.2009-02-10 14:14, By: retiredbob, IP: []

L4: Tax Issue From Setting Up Wife’s 72tBob,It appears the problem lies with your entry of the 1099R for the after tax distribution. I don’t know why there was a small pre tax amount with that distribution, but it might be earnings or dividends that did not get included in the direct rollover. In any event, only the 408.40 is taxable and subject to the 10% penalty. There should also have been 20% withholding on the 408.40. Perhaps the entry of this particular 1099R is the source of the large difference in taxes as the entire amount might have been entered as taxable, and if it is taxable it would also be subject to the penalty.2009-02-10 18:38, By: Alan S., IP: []

L2: Tax Issue From Setting Up Wife’s 72tPlease clarify the following:”She rolled over her company pension and part of her 401k money directly into her IRA.”Was the “rollover” handled as a “trustee-to-trustee transfer” with no tax withholdingor did she receive a check, payable to her, and then she deposited that check and an amount equal to the mandatory 20% withholding into the new IRA? If she received a check payable to the IRA custodian but “FBO: (your wife’s name)” then the 20% withholding does not apply.What “part of the 401k money” went into the IRA and where is the remaining part of the 401k?When you answer these two questions I think we will have a better understanding of your situation.Jim2009-02-10 15:03, By: Jim, IP: []