A taxpayer (Under 59.5) took a 401k hardship withdrawal for their dependent child's college tuition which is an exception to the 10% penalty. However the 1099R was coded 1 (Early Distribution, No Known Exception) in Distribution box 7 making the software included the 10% penalty. Did the Administrator code it incorrectly or is there a different way in the software to make it so it does not include the penalty?
Thank you.
As Bob said, you have to complete form 5329 and select which exclusion applies from the drop down list for line 2.
The 1099 administrator has no idea if your client qualifies for an exception.
@BobKamman wrote:
Form 5329, Line 2, Exception 8 might apply.
Did the law change? Or are we assuming that the OP wrote 401k but really meant IRA?
Maybe you can find another exception from the list but there's no penalty exception for education expenses from a 401(k).
https://www.irs.gov/pub/irs-pdf/i5329.pdf
See page 4. Note that exception 08 applies to IRA distributions.
Personally I wish Congress would fix this. The rules are inconsistent. If they rolled the 401(k) into an IRA first and then made the withdrawal, no penalty (not likely permitted for a current employer plan but easy if they have any former employer plans). IMO this disproportionately impacts lower-income taxpayers. Folks with multi-million dollar retirement accounts can also afford savvy advisors who can tell them if they're going to do this they have to click their heels together three times while repeating "There's no place like IRA".
Rick
Great catch, I was on the IRA bandwagon did not catch the 401K distribution as opposed to IRA. The client can take a loan from his 401k but that would not generate a 1099 unless you default.
To @ST2
I did my homework, the administrator for the 401K can allow a distribution for higher education expenses but the distribution does not meet any 401-K exceptions from the 10% penalty.
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