Loan from co 401(k) in Dec 2007
33y/o client takes out $15,000 loan from his 401(k) in Dec 28, 2007- client becomes unemployed in Jan 2008. client continues to repay thru June 2008 at $300/mo.
client now decides to rollover remaining bal approx. $70,000
Would it be your opinion that co. would issue a 2007 1099 and client would need to amend 2007 1040 show $15,000 as ord inc. + fed+state penalties?
I believe this might be the case and a strategy to offset the add’l taxes for 2007 (his last full timeearnings yr) would be to take a distribution of $15,000 less what was repaid in 2008, pay the loan off and rollover the balance. This would eliminate the $15,000 being taxable for 2007 and require an amended return + significant add’l taxes. Thank You for commenting
DanB[/quote]
Permalink Submitted by Martin Helmer on Thu, 2008-06-19 16:58
No part of the loan is taxable in 2007, assuming the transaction was properly set up. A loan is a plan investment and is not a distribution. The loan becomes a deemed distribution within a few months after a scheduled payment has been missed. If your client rolls over the $70,000 net worth of his account prior to there being a deemed distribution, the plan will probably offset the loan balance.
For example, if the loan balance after June is $13,500, that means the plan shows the total account to be $83,500. An offset occurs when the $70,000 is rolled over. With an offset, the $13,500 is rollable, so the plan will withhold 20% of $13,500, which results in $2,700 being taken from the $70,000 and therefore not being rolled over either. The plan will issue a 2008 Form 1099-R for $83,500, of which $67,300 was rolled. The other $16,200 is taxable in 2008, unless client comes up with some or all of that amount withing 60 days and rolls it too.
A deemed distribution cannot be rolled over. If deemed distribution occurs before offset, then $13,500 is taxable in 2008 and $70,000 is rolled over. Depending upon how the plan is written, a deemed distribution might not occur until as long as 5-6 months after a missed loan payment.
Permalink Submitted by Alan Spross on Thu, 2008-06-19 17:04
These situations can be quite complex, and I suggest checking with the plan administrator to determine how this will be handled. However, since the distributable event occurred in 2008, I would not expect a 1099R indicating any 2007 reporting.
If the plan does not allow a payoff, he will probably get a 1099R showing an offset distribution for 2008 that is taxable and subject to early withdrawal penalty. However, since an offset distribution is rollover eligible, if he has the funds he could complete a rollover and avoid these taxes.
If the plan will allow a loan payoff, then he could pay off the loan and do a direct rollover of the entire amount. If he was never in default, there has probably been no deemed distribution processed. But again, with all these variables, I suggest talking to the plan administrator, particularly if he is capable of a loan payoff.