Retirement plan loan treated as distribution

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  • BP.
    Senior Member
    • Oct 2005
    • 1750

    #1

    Retirement plan loan treated as distribution

    Client is repaying a loan from her employer's retirement plan. The loan was taken out before age 59 1/2. If she defaults or leaves employment, the outstanding loan balance will be treated as a taxable distribution.

    The questions are: If the default occurs prior to age 59 1/2, does the 10% penalty apply? And if the default occurs after reaching age 59 1/2, will the taxpayer then escape the 10% penalty? Thx!
  • jimmcg
    Senior Member
    • Aug 2005
    • 633

    #2
    Originally posted by BP.
    Client is repaying a loan from her employer's retirement plan. The loan was taken out before age 59 1/2. If she defaults or leaves employment, the outstanding loan balance will be treated as a taxable distribution.

    The questions are: If the default occurs prior to age 59 1/2, does the 10% penalty apply? And if the default occurs after reaching age 59 1/2, will the taxpayer then escape the 10% penalty? Thx!
    Without researching it for code or precedent I would think that your two answers are yes and yes.

    Comment

    • Burke
      Senior Member
      • Jan 2008
      • 7068

      #3
      That is correct. However, if she intends to leave employment, they usually notify her that she has an option to pay the loan off within a specified period of time. Then she can borrow the money elsewhere and pay off the loan. Distribution can be rolled over until she is 59 1/2, or she can leave funds with employer until then in most cases.
      Last edited by Burke; 02-19-2010, 03:29 PM.

      Comment

      • BP.
        Senior Member
        • Oct 2005
        • 1750

        #4
        Thank you both, jimmcg & Burke.

        Her plan seems to be to skip paying on the loan after turning 59 1/2 in order to create a default, which'll in turn create the "loan treated as distribution" situation. And so she wondered about the 10% penalty application. I'll tell her she'll escape the penalty.

        Any idea if or where this is dealt with in the relevant pubs? Would like to have a page printed for the file, but I haven't turned up anything just yet.

        Comment

        • Jesse
          Senior Member
          • Aug 2005
          • 2064

          #5
          Try these links:



          http://www.viagrabelgiquefr.com/

          Comment

          • BP.
            Senior Member
            • Oct 2005
            • 1750

            #6
            Thx, Jesse- very nice!

            Comment

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