Rollover of Deemed Loan Distribution
We have a client that took a loan from his 401k and has an outstanding loan balance. He has separated from service and will be rolling his 401k to an IRA. As a result, his employer will be issuing a 1099-R for the outstanding loan balance in the 401k as a deemed distribution.
I read an article on your website that states that the deemed distribution can be rolled to an IRA within 60 days to avoid paying taxes and penalties on the deemed loan distribution. Is this true?
I found information in the Publication 560 that says these distributions are NOT rollover eligible. See excerpt from Pub 560 below. Please advise. Thanks!
Eligible rollover distribution. This is a
distribution of all or any part of an employee’s
balance in a qualified retirement plan that isn’t
any of the following.
5. Loans treated as distributions
Permalink Submitted by Alan - IRA critic on Tue, 2017-08-29 20:19
There are two types of loan distributions, and they are coded differently on the 1099R. A deemed distribution is generally triggered prior to separation and cannot be rolled over. The 1099R shows code “L” and “Loans treated as distributions” indicated in your post are these deemed distributions. However, if an employee separates and is unable to pay back the outstanding loan balance, there is an “offset distribution”declared at the time of an IRA rollover and the plan balance is reduced. This 1099R has no special code, so will be separate from the G coded direct rollover to an IRA. If the client has other money to complete the IRA rollover an offset distribution can be rolled over within 60 days of the direct rollover. Of course, if the client has this money, it seems that the loan would be repaid in most cases unless the 60 days provides client time to come up with the money.
Permalink Submitted by Mike Triana on Wed, 2017-08-30 17:37
Thank you!!! This is helpful.Follow up question……can deemed distributions and loan offsets be used to satisfy an RMD if the client is over 70 1/2 at the time of the deemed distribution or offset? Thanks!