Tax effect on loan in 401k
Client has old 401k that must be rolled to an IRA.
Turned 70 in August of 2010.
$ 20,000 loan exists in 401k.
If Rollover occurs, we are aware outstanding loan is taxable.
If client waits until next year when turning 70 and a half, will this count as RMD?
Permalink Submitted by Alan Spross on Fri, 2010-10-15 20:39
There are various reasons why it might HAVE to be distributed at this time, other than client’s choice.
Crediting of the loan payoff toward the RMD in 2011 depends on whether the loan is reported as a deemed distribution or an offset distribution. If a deemed distribution, then it will reported with a Code L in Box 7 of the 1099R and the 20k CANNOT be credited against the RMD. However, if his loan payments are current the loan amount should be reported as an OFFSET distribution and it would be coded like any other 401k distribution and mandatory 20% withholding would apply for any amounts that are in excess of the RMD. There is no mandatory withholding on RMD amounts because they are not eligible for rollover. Offset distributions are rollover eligible unless otherwise specifically not eligible, so if the 20k is an offset distribution, client could come up with funds to roll it over, but only up the amount that exceeds the RMD.