401k Loan/Penalty
57 year old client has a 401(k) with a loan. if they roll it all to an IRA the loan is a taxable event. They would also pay a 10% penalty correct?
57 year old client has a 401(k) with a loan. if they roll it all to an IRA the loan is a taxable event. They would also pay a 10% penalty correct?
Permalink Submitted by Alan Spross on Fri, 2011-03-11 21:59
Probably. I have not been able to dig up any documentation how this question might be affected by the age 55 separation from service exception.
If a client separates from service with an unpaid loan and fails to repay it in the short period of time provided, the 1099R will be coded as an offset distribution and will include the full unpaid loan balance. Even though the client separated from service after 55, most plans will code the distribution as early prior to 59.5 and treat the loan as distributed due to failure to repay rather than due to separation from service. Two 1099R forms would be issued, once for the direct rollover of the balance of the plan to an IRA coded G, and the other for the amount of the defaulted loan coded 1 or 7. Now if the employee filed a 5329 claiming the separation from service exception, it might work ……or not. This would probably be more likely to work if the 1099R showed an actual distribution rather than a deemed distribution coded L.
If this plan allows in service distributions, then the options get even more complex. See attached:
http://www.relius.net/News/TechnicalUpdates.aspx?ID=262