401K to Rollover IRA

[appelman]

As a practical matter...

If the IRA custodian will take the 13K, and I don't see why they shouldn't, I'd certainly be inclined to give it a try.

[taxxcpa]

I agree she should have waited until she got the sign-on bonus before rolling it over, paid off the loan and rolled over the total as a direct rollover. Or, alternatively, paid off the loan, taken the money then put it in the rollover IRA--and when she got a 1099R with a code 1, show it as a rollover. All of this would achieve the desired result without question.

It may boil down to whether the Rollover custodian will accept the $ 13000 into the Rollover.

I tried creating a return for Adam Aardvark, a non-existent client, and showing, on a 1099R, $ 100,000 as a direct (code G) rollover and then entering a second 1099R with a code 1, and identifying it as a rollover. It shows up on the form 1040 as a single figure as $ 113000 with "rollover" printed on the 1040. So, at least, I got no error message from the tax software.

Of course, just because the software accepts it, doesn't prove it is OK.

[Roberts]

Let's assume a direrct transfer of 100k. So the 1099 will show total distributed of $113,000 and taxable $13,000. Why can't the TP make a $13k rollover deposit within 60 days? I can't think of any reason this won't fly.

What they SHOULD have done is paid the income tax on the $13k and repaid the loan as much as possible to avoid the penalty as much as possible. After leaving your job, you have 60 days to repay any loans. Why would they do a 401-k rollover so quickly?

The loan is considered a distribution for 60-day repay when the loan is taken out, not when they call it a loan loss.

[Kram BergGold]

I think I disagree

Let's assume a direrct transfer of 100k. So the 1099 will show total distributed of $113,000 and taxable $13,000. Why can't the TP make a $13k rollover deposit within 60 days? I can't think of any reason this won't fly.

[FEDUKE404]

Bad choice

I'm not too sure that dog will hunt....

When she closed her prior 401(k), I'm sure internally she had $13k of taxable income and a rollover amount of only $100k. (Hopefully it was institution to institution transfer or any tax withholding could muck up things further!)

There is nothing left to roll over except the theoretical $100k...assuming that full amount was actually paid out to her.

The $13k "make up" money would then need to be considered as new funds into an IRA, with all of the usual IRS restrictions on such. Even IF it was possible for the employee to "break even" by somehow putting the other $13k into an IRA account (and thus negating the taxable $13k) I believe those funds could not be legally placed into the rollover account. You would have to check with the plan administrator on that.

BOTTOM LINE: I know times are tough, but generally speaking borrowing against your retirement account is on the most unwise financial decisions a person can ever make. It is quite possible that a person can end up netting (after federal tax/state tax/early withdrawal penalties) not much more than 50% of the amount withdrawn. I'm not even sure the mafia reaches those levels... (And don't get me started on "paying yourself" either.....in most/all plans whatever principal you withdraw no longer earns, tax free no less, any income!)

FE

[taxxcpa]

A client changed jobs and rolled over her 401K minus $ 13,000 that she had borrowed from the plan which the 401K custodian kept to pay off the loan.

She got a sign-on bonus with the new job which enables her to place $13000 more into the rollover IRA than the net she received from the 401K.

Assuming that she had $113000 in the 401K and she had a direct rollover of $100,000. Then, using $ 13000 of her sign-on bonus she places $13000 in the new rollover IRA bringing it up to the total amount which would have been available if she had paid off the loan before making the rollover. (all done in a few days after leaving her old job)

I assume that she will get two 1099s--one for the direct rollover amount and a second one shown as a taxable withdrawal for the $ 13,000. Can she then identify the $ 13,000 as an indirect rollover?

If she had taken it all in cash without the direct rollover, she would have probably received one 1099 for the entire amount and could have identified it all as an indirect rollover. If she had paid of the loan before rolling it over, it could all have been identifed as a direct rollover. Therefore, I believe she can take it all as a nontaxable amount by the two-step approach she has taken. Am I right or wrong?