Rollovers from a 401k plan
I want to get some clarification on the rollover rules. Can you make a rollover from an existing 401k (current employer) at any time or only once you are no longer an employee?
My client (age 55) requested a rollover from Employer 403 (B) to an outside IRA and he already received a check written to the IRA holder but he didn’t send the check in yet. The original 403 (B) had an outstanding loan. While completing the rollover transaction the processing agent didn’t advised my client that the unpaid loan is deemed to be a distribution and is subject to taxes and penalties. Upon receiving the check he called back and was told that transaction is irreversible and he’ll get distribution 1099 form at the end of the year. Should he know about that, my client wouldn’t complete the rollover because the original loan was used to purchase his house and he doesn’t have the money to pay taxes and penalties next year. What are his options to avoid that? Are there any circumstances, which would allow him to reverse this whole thing?
Client should verify with the plan whether the outstanding loan is treated as a deemed distribution or an offset distribution. If an offset distribution due to client separating from service the client will have until 4/15/2025 (or 10/15/2025 if client files an extension) to roll back the loan amount, and that will eliminate any tax or penalty on the distribution. I understand that client likely will not be able to come up with these funds to complete a full rollover, but perhaps can come up with part of it.
Client will probably get 2 1099R forms, one coded G for the direct rollover and another coded 1 or 2 for the taxable outstanding loan, and this is the 1099R income that could be offset by a rollover if client can produce the funds to do so.
On the other hand, if this is a deemed distribution, there is no possibility of a rollover, but if client separated from service in the year they reached 55 (or later), the 10% penalty should not apply.
Permalink Submitted by Alan - IRA critic on Fri, 2024-07-19 13:08
This depends on the specific plan provisions. While elective deferrals cannot be distributed in service prior to age 59.5 in any case, a plan may allow gains or matching contributions to be distributed as well as amounts that were rolled into the plan from another plan or IRA. Therefore, the participant needs to check with the plan administrator what if any portion of the plan is available for distribution based on the participant’s age at the time.