401-K to IRA rollover caused while completing an NUA transaction
I just finished “The Retirement Savings Time Bomb Ticks Louder” and really appreciate the five steps outlined as a way of keeping more of my hard-earned dollars in my family, as opposed to giving my so-called Uncle a ton of extra money!! I do have a question that sprung from my liquidating my company 401-K ( which was comprised of Roth and Traditional accounts) due to my retirement in November 2023. The traditional 401-K had a company stock portion that was completely rolled in-kind to a separate brokerage account through an NUA transaction in April 2024. At the same time, the remaining money in my Traditional 401-K was rolled-over to a Traditional IRA (trustee to trustee). However there was an outstanding traditional 401-K loan of $20,000 that I was making payments against from my retirement date through my NUA-driven rollover of the 401-K account. My question is can I repay that outstanding loan balance ($20,000) by the end of 2024 to my IRA and not incur any ordinary income tax due on that money? I am 66 years old so no IRA distribution penalty applies, it’s a pure possible taxable income situation play.
PS – I too, like Ed Scott, am a long time Mets’ fan hoping the spurts of recent good play continues this entire month…. LFGM from me to Ed.
Permalink Submitted by Alan - IRA critic on Thu, 2024-09-05 16:45
Since NUA requires the 1099R “total distribution” box to be checked, you need to be sure that the plan will process an “offset distribution” 1099R in addition to the other 1099R forms you will receive. Better verify this with the plan ASAP. An offset distribution is the taxable distribution of the outstanding loan balance from the plan and this is critical because your plan year end balance must be 0 for you to have a qualified LSD for NUA purposes.
The 1099R offset distribution will allow you plenty of time to come up with other funds to complete an IRA rollover of the 20,000. You actually have until your tax due date plus extensions to complete the IRA rollover and eliminate the tax on the 20,000.
Again, there are two issues. First is the offset distribution of the loan, which is needed for the lump sum distribution. Separately, you can then complete an IRA rollover to eliminate the tax on the offset distribution if you wish.
Permalink Submitted by Tony Guarino on Fri, 2024-09-06 17:16
This is good news regarding my timeline. I plan to pay the offset loan repayment this week and then I’ll verify that an “offset distribution 1099R” is to be provided me for 2024. I believe this addresses the two issues you highlighted?
Permalink Submitted by Alan - IRA critic on Fri, 2024-09-06 19:30
I’d verify that the 1099R (Coded M for loan offset distribution) will be issued in January before doing the IRA rollover. You also need to know this for purposes of the achieving a qualified lump sum distribution for NUA purposes.
Permalink Submitted by Tony Guarino on Sat, 2024-09-07 15:12
Thanks for the guidance and I’ll focus on getting the 1099R distribution code and noted.