Outstanding 401(k) loan – IRA Rollover
Good Morning –
I am looking for assistance with the following scenario:
401(k) participant recently retired with an outstanding loan balance of $16k (total 401k value $140k)
Retiree wants to payoff loan with the proceeds from the liquidation of his 401(k) account and transfer the remainder to an rollover IRA
I am under the impression this is [u]not [/u]permitted unless the retiree comes up with the assets (i.e. 16k) from other sources. If other assests are not available the o/s loan balance is taxable plus a potential 10% penalty if under age 59.5.
Thank you in advance
Brian
Permalink Submitted by Greg Henson on Mon, 2012-06-04 14:55
That’s correct, Brian. The loan has to be paid with money outside of the plan. If he doesn’t pay the 16k then he would owe all taxes and a potential 10% penalty.
Permalink Submitted by ShipsnGiggles on Mon, 2012-06-04 15:58
Thank you for the prompt reply.
Is there any situation a retireee could acomplish this? The individual I am working assured me he has done this previoulsy with other clients.
Thank you
Permalink Submitted by Denise Appleby on Mon, 2012-06-04 16:12
[quote=”[email protected]“]That’s correct, Brian. The loan has to be paid with money outside of the plan. If he doesn’t pay the 16k then he would owe all taxes and a potential 10% penalty.[/quote]
Hi mrgreghenson,
I agree on the penalty etc on any pre-tax amount. However, the loan can actually be offset against the participant’s account balance. So, if the balance is $140,000 and part of that $140,000 includes the outstanding loan of $16,000, the $16,000 can be offset against the balance, resulting in $124,000 being rolled over to the IRA.
1099-Rs would be issued for the $16,000 as a taxable distribution and for the $124,000 as a rollover to the IRA. If the participant is able to come up with the $16,000 within 60-days, that amount can be rolled over as well- that is, assuming the amount is in fact eligible to be treated as an offset and not a deemed distribution.’
Permalink Submitted by Greg Henson on Mon, 2012-06-04 16:29
Hi Denise:
yes, it can be offset at the time of distribution but that doesn’t mean he’s paying for the loan with assets from the 401k balance. In effect, the loan amount he took out has already been taken from his account. So “technically” he only has a 401k balance of $124k as it stands today. If he were to rollover 100%, he would be eligible to do the $124 and the loan would default automatically and a 1099-R created.
Permalink Submitted by ShipsnGiggles on Mon, 2012-06-04 18:23
Thank you for the prompt and detailed responses.
[i]”If the participant is able to come up with the $16,000 within 60-days, that amount can be rolled over as well- that is, assuming the amount is in fact eligible to be treated as an offset and not a deemed distribution.”[/i]
What situation would have applied for the loan to be considered a deemed distribution as opposed to a loan offset?
Thanks again,
Brian
Permalink Submitted by Alan Spross on Mon, 2012-06-04 18:51
Here is some additional info:
http://www.relius.net/News/TechnicalUpdates.aspx?ID=262
Note that separation from service is a “distributable event” and therefore this should be an offset distribution.However, it is a good idea to verify this treatment ( 1099R coding intent) before completing the rollover using other funds.