401(k) loan offset at retirement
Assume a worker is 62 years old with a $500,000 401k.
They take a loan from their 401(k) of $30,000, leaving them with $470,000. They subsequently retire one month later and roll the balance of their 401(k) to their IRA. They have no intention of paying back the loan.
Would the plan roll out the remaining $470k to their IRA and send a 1099 for $30k the following year? Is there no 20% withholding in that case? Or would they offset it by a larger amount, say $37,500 so that they could withhold $7500 for taxes?
Thanks!
Permalink Submitted by Alan - IRA critic on Thu, 2025-01-23 12:06
There would be no withholding unless an amount was distributed directly to the participant. A 1099R coded G would be issued for the 470k direct rollover and a 1099R for 30k coded M (plan offset distribution).
The worker has until the tax filing due date plus extensions to make a rollover contribution of the 30k offset distribution and eliminate taxation if they chose to.
Permalink Submitted by Michael Frontera on Thu, 2025-01-23 12:29
Great, thank you. And my understanding is that rollover can be made in part as well.
Permalink Submitted by Alan - IRA critic on Thu, 2025-01-23 12:52
Yes, any portion of the 30k could be rolled over using other funds of the worker, and such rollovers can be done at different times as the funds become available to the worker.
When depositing the rollover funds, the IRA custodian must be informed that the rollover is of a QPLO distribution so that they code it correctly on Form 5498.