401K ROLLOVER WITH OUTSTANDING LOAN
Under the new tax law, I understand that if one has an outstanding loan, terminates service with an employer and rolls it over into an IRA, they have up until October of the following year to pay off the loan. Question: the employer will issue a 1099R, however, how does one reconcile that on their tax return?
Permalink Submitted by David Mertz on Sat, 2019-11-09 04:38
Following termination from service, the loan is satisfied by the plan making an offset distribution from the 401(k) that reduces the balance to the credit of the former employee (without actually distributing any cash since the cash was already removed from the 401(k) as a loan). At that point the loan is paid off and gone. The offset distribution is reported on Form 1099-R with code M in box 7 (along with code 1, 2, 4, 7 or B, whichever is applicable), indicating that the former employee has until the due date (including extensions) of the tax return for the year in which the offset distribution occurs to come up with the money and complete a rollover of the amount of the offset distribution to another retirement account such as an IRA. The distribution and rollover are reported on the tax return the same as any other distribution and rollover, making the amount rolled over nontaxable.