Rule of 55 for a 401k Loan
If a client retires at age 56 and has loan in their 401k, do they receive a penalty on the loan amount if we do not pay it and roll out the 401k funds to an IRA or do they just have to pay taxes on the loan balance?
We are wanting to know if the rule of 55 would apply to the loan balance or not because it would apply to a regular distribution form the 401k.
Permalink Submitted by Alan - IRA critic on Tue, 2025-03-04 10:33
Usually, the age 55 separation exception will apply to offset distributions and the 1099R should be coded M2.
However, if the loan was in default prior to reaching the age 55 year or if there was a prior deemed distribution (1099R code L1, the penalty would apply.