Are distributions from ESOP 404K fully taxable? Reported on 1099R Code U

[itonewbie · Accepted solution]

Yes, it is fully taxable but not subject to early distribution penalty.  You may want to be aware that this dividend distribution does not qualify for capital gain tax treatment either.

[strangelove]

Thanks for your help- itonewbie

[itonewbie]

Glad to be if help :smile:

[RLorgeEA]

So additional question on this topic.  Client received 1099-R with Code U, but he used the entire distribution of $12,500 to open a Rollover IRA.  If the ESOP distribution is fully taxable, and the program does not let me enter a check in the "Full amount rolled over" box, how do I reflect this on the return?  Thanks in advance for your reply(s).

[itonewbie]

You're sure that all code U for div from ESOP?  That's an awful lot for ESOP dividend.

That aside, the code normally won't let you have the cake and eat it too.  So, no, the reg doesn't allow rollover for div distributions from ESOP.

[qbteachmt]

Roth is not tax deductible, so a "rollover" like this is not sheltered from taxes. The taxable distribution allowed this person to Fund their Roth. That's really all that happened.

[itonewbie]

Agree.  That's the way to look at it.  So long as the taxpayer has sufficient earned income (forget about the Code U distribution, which is not), the client can make IRA contribution.  Whether it's deductible would depend on whether the taxpayer is an active participant and the MAGI.

[sjrcpa]

And $12,500 exceeds the ROTH contribution limit.

[itonewbie]

Something doesn't smell right with this one.

[qbteachmt]

I used to copy Text from the original question, to see my specific reply in perspective, and to keep people from being able to Remove all original content.

Dang it.

[qbteachmt]

Oh, wait; I see this is the new info, and I forgot: "Client received 1099-R with Code U, but he used the entire distribution of $12,500 to open a Rollover IRA. If the ESOP distribution is fully taxable, and the program does not let me enter a check in the "Full amount rolled over" box, how do I reflect this on the return?"

There; now it is documented.

[itonewbie]

Oh, actually, that's new info that got added to the thread today.  It's not in the original post.  No worries.

[RLorgeEA]

I will have the client double-check on whether all of it was dividends.  Thank you for your reply.

[itonewbie]

NP, @RLorgeEA.