1099-R Code 3
Client just took a medical retirement due to COVID. Has 80% lung function loss, and is considered permanently disabled. He is 49 years old, and took a 10 year payout from his $3.2 million ESOP. He is going to receive his first installment in a matter of weeks. It has been confirmed that the 1099-R will be marked code 3 due to disability. My question is this…if he doesn’t want to show the entire $320k as income this year, can we do a 60 day rollover with a portion of the distribution to an IRA, and still withdraw money later and get the code 3 exception? My guess is yes, but I wasn’t sure of the process once it flowed into, and then back out of, an IRA. – Thank you
Permalink Submitted by Alan - IRA critic on Tue, 2021-09-21 20:52
I think the 10 year payout is probably rollover eligible even though payments for 10 years or more are not eligible rollover distributions. The 10 years might be interpreted to be actually be less than 10 years based on the payout dates. This would have to confirmed with the ESOP administrator. One way to tell is if the first distribution has 20% withheld that is an indication that the distribution is rollover eligible. As for IRA funds, he is definitely disabled and the IRA custodian should also report using Code 3. They might require some documentation such as a letter from his MD indicating that he is disabled according to Sec 72(m)(7). Also, note that the installment payout pretty much impairs his ability to utilize NUA since NUA requires a lump sum distribution. There is no one rollover limit for distributions from a qualified plan as long as they are eligible for rollover in the first place.