401K loan
If we take a loan from our 401K (we are aware it must be repaid with interest to avoid tax and early withdrawal penalty):
1. Must it be repaid in, at a minimum, level monthly or yearly payments, OR can it be repaid in one payment, say within 5 yrs?
2. Do we need to declare the purpose of the loan – e.g. Education?
3. Is the loan a tax reporting non-event or is it reported as a distribution or some other 1099?
4. Are we correct that no changes have recently occurred – that no loans are permitted from an IRA (Roth, TIRA, nor Beneficiary/inherited IRA)?
Thanks for your help
Permalink Submitted by Alan Spross on Tue, 2011-06-28 22:52
There is considerable plan flexibility when it comes to loan administration:
1) A payroll deduction agreement is required, although I expect that most plans would allow you to pay off the remaining balance at any time. But payroll deduction would have to start right away.
2) The loan request form will probably ask for the reason, but acceptable reasons are very broad, much broader than a hardship distribution.
3) It is a non reportable event until there is either a deemed distribution or an offset distribution. An offset occurs when the plan balance is fully distributed after separation. A 1099R has a special coding for a deemed distribution, and these cannot be rolled over, while an offset distribution can.
4) Right – no IRA loans allowed, other than if you consider temporary 60 day use prior to rolling the funds back as a loan.
Permalink Submitted by W Dobroski on Tue, 2011-06-28 23:24
Thanks very much Alan for the helpful reply