Roll Over a Loan?
In a recent Morningstar piece, Natalie Choate was describing the implications of having a loan against the employer’s retirement plan where “the plan terminates, or the employee’s employment terminates.” She says that “he can roll over that distribution to avoid being taxable on it.” The only way I can think of that one might be able to roll a 401(k) with a loan balance into an IRA and not have the loan treated as a distribution would be to add to the IRA an amount equal to the remaining loan balance, but I’m guessing. Would you clarify what she’s referring to?
Permalink Submitted by Alan - IRA critic on Fri, 2018-01-12 17:51
Yes, she is referring to a loan “offset distribution” in which the plan balance is reduced by the amount of the outstanding loan. As you indicated, the participant would have to come up with the money from other sources in order to complete such a rollover. The TCJA considerably extends this rollover deadline from 60 days to the extended due date for the tax year of the distribution. The plan 1099R will include in Box 1 the plan balance that includes the outstanding loan amount, but will only pay out the net amount in the plan after deducting the loan balance. The Box 1 amount would be taxable (and perhaps subject to penalty) if the participant did not complete the rollover. The IRS will have to provide reporting instructions for the tax year of the distribution when the rollover has not yet been completed and there are several more months to complete it – perhaps the IRS will allow reporting a rollover with the intent to complete it, but if not completed the participant would have to amend the filed return. Late interest would probably be due if this is what the IRS guidance indicates. That tax return would probably be extended by the participant if they did not know if they could complete the rollover or any part of it.