Employee terminates employment with an outstanding Loan;
401(k) plan participant terminates employment with Employer A in March of 2024. Does not pay back a $30,000 outstanding loan and the Plan of Employer A does not allow the transfer of Plan loans. Plan Participant rolls over account balance to their new employer plan B minus the plan loan offset. The participant has until their personal tax filing date of 4/15/2025 (without extensions) to make a $30,000 deposit to the IRA to keep the Plan Loan from being taxed in 2024. Can this contribution be made with a $30k plan rollover distribution from their new employer B’s plan ? (The plan has an age 59 1/2 in-service distribution provision and the participant is age 60!). This rollover would be tax-free?… And its purpose is to keep the plan loan offset from being taxable in 2024!?
Permalink Submitted by Alan - IRA critic on Tue, 2024-09-03 17:08
The offset distribution can be rolled over by the due date plus extensions if a timely extension is filed, so doing so would extend the rollover deadline to 10/15/2025.
But a direct rollover from the new plan cannot be used for the rollover funds, which means that the 30k direct rollover cannot do double duty. Further, the QPLO contribution to the IRA will have to be reported as such by the client when doing a rollover and the IRA custodian will code the contribution on Form 5498 as a QPLO contribution by entering “PO” in Box 13.
Therefore, to complete this rollover the client would need a distribution of 37,500 (less 20% WH = 30,000) in order to fund the QPLO rollover. Then client will be taxed on 37,500 on the 2025 return. Perhaps the loan offset distribution was done prior to 59.5, and client wants to avoid the 10% penalty, but because client will then be taxed on 37,500 more in 2025, there would be no savings and perhaps a cost to funding the QPLO contribution from the new 401k.
Client would be better off to attempt to save enough (perhaps by reducing new 401k contributions) to complete all or part of the rollover by Oct, 2025, and should file an extension for the 2024 return to complete as much of the rollover as possible before filing.