401k Distribution
Have a client who is 49 and was just furloughed, soon to be let go from employer. He has a 401k which also has a loan with outstanding balance of approx $35k. if the client is fired is there any relief from the penalty if they do not pay back the loan? could it be considered a distribution and they pay taxes in 2020 on the “35k distribution” to pay the loan?
OR, they are in higher tax bracket and do have some funds to pay the loan off but not sure how long he will be out of work? We considered paying the loan with the funds to avoid penalty and distribution in 2020, then hope he can take a distribution later in 2020 under the CARES Act up to the $100,000 to be paid back over next 3 years? Thoughts?
Permalink Submitted by Alan - IRA critic on Fri, 2020-07-31 00:38
If upon termination, if the loan becomes immediately due, the offset distribution will qualify as a CRD, therefore no penalty and 3 year repayment options apply. Client could use the rest of the plan balance and therefore withdraw up to 65k as a CRD with 3 year repayment option as well. However, any CRD distribution must be completed by 12/30/2020 and may be a better option even if the plan adopts some of the CARES Act loan extensions (optional for the plan), as he may then have to repay the loan under less favorable terms. To determine all possible options, he will have to determine what loan payment relief is provided under the CARES Act as adopted by the particular plan. If not beneficial, he can fall back on the CRD approach.