401K to Rollover IRA

[Burke]

Here is a link which discusses this matter pretty fully. http://www.relius.net/News/TechnicalUpdates.aspx?ID=263.

It states: "A deemed distribution...is not an eligible rollover distribution." It also states: "The distribution of a loan offset is an eligible rollover distribution."

However, I am still not clear what the difference between the two is, but it appears termination of employment is the deciding factor?

[taxxcpa]

Deemed distribution

It looks to me like a "deemed distribution" takes place when the borrower defaults on the loan.

If the loan was still in good standing and is deducted from the distribution and the borrower COULD have
repaid it before taking the direct distribution into the rollover IRS, it is all right for the borrower to use
other funds to place an equal amount in the rollover IRA.

One new question occurred to me: money received first, then rolled over is supposed to have 20% tax withheld.
Does that mean a $ 13000 reduction for loan repayment would mean it was really a $ 16250 loan minus $ 3250 tax?
Or maybe it was reduced $ 10833 plus $ 2167 tax. I left a message on the client's phone asking about the tax WH.
Possibly the withholding is not required in this kind of situation.

[FEDUKE404]

Tax withholding is irrelevant

It looks to me like a "deemed distribution" takes place when the borrower defaults on the loan.

If the loan was still in good standing and is deducted from the distribution and the borrower COULD have
repaid it before taking the direct distribution into the rollover IRS, it is all right for the borrower to use
other funds to place an equal amount in the rollover IRA.

One new question occurred to me: money received first, then rolled over is supposed to have 20% tax withheld.
Does that mean a $ 13000 reduction for loan repayment would mean it was really a $ 16250 loan minus $ 3250 tax?
Or maybe it was reduced $ 10833 plus $ 2167 tax. I left a message on the client's phone asking about the tax WH.
Possibly the withholding is not required in this kind of situation.

It is always the gross amount, as shown on the Form 1099-R, not the net amount (such as decreased amounts due to withholding) that would have to be rolled over to remove the potential tax burden.

That is why institution to institution transfer (no taxes withheld!) is generally far better than touching the money. Also those IRS-mandated time deadlines ARE set in concrete!

As to whether federal tax withholding is "required" whenever a check is written to the taxpayer is something I cannot answer. There is a difference between "customary" and "required."

A simple explanation: Client closes out a $100k 401k, gets a check for $80k (20% US withholding), and later takes the $80k check to his whiz-bank brother who is an investment advisor to fund a new IRA. (Well, he did roll over the check, right????). Unless the client somewhere finds another $20k to give to his brother, he will be facing taxes/penalty on the missing $20k he did NOT roll over.

It happens all the time...............(and, as noted, frequently only discovered when it is too late to remedy the situation).

FE

[Bees Knees]

Here is a link which discusses this matter pretty fully. http://www.relius.net/News/TechnicalUpdates.aspx?ID=263.

It states: "A deemed distribution...is not an eligible rollover distribution." It also states: "The distribution of a loan offset is an eligible rollover distribution."

However, I am still not clear what the difference between the two is, but it appears termination of employment is the deciding factor?

The deemed distribution that does not qualify for rollover treatment in your linked article is talking about when the loan no longer qualifies for the distribution exception, such as when the loan balance exceeds $50,000, or the loan takes longer than 5 years to repay. As the article explains, the loan balance is still considered a part of the 401(k), even though for tax purposes the participant has to pay tax on it. The deemed distribution is for tax reporting purposes only, because it really was not a distribution. That is why it is not an eligible rollover distribution, because it is still considered money that belongs to the 401(k) under the terms of the loan.

In other words, you can't roll something over until it is actually no longer a part of the original account balance.

On the other hand, a 401(k) that is cashed out no longer has any money in the account balance. Nothing in IRS Pub 575 says the outstanding loan balance can't be rolled over under the circumstances. Technically it is not a deemed distribution because the loan did not exceed $50,000 nor take longer than 5 years to repay. But it is still considered a distribution because the 401(k) was cashed out, in which case you have 60 days from the date the loan is considered distributed to the date it must be rolled over into a new qualified plan or IRA.

If anyone has any other citation to contradict what I just said, I would be glad to see it.

[Roberts]

But it is still considered a distribution because the 401(k) was cashed out, in which case you have 60 days from the date the loan is considered distributed to the date it must be rolled over into a new qualified plan or IRA.

You have 60 days to repay the loan upon terminating employment. You are not limited to 60 days to roll over into a new qualified plan (there is no requirement to move assets from a 401(k) upon leaving the job).

You are prohibited from transferring a loan balance.

[New York Enrolled Agent]

The deemed distribution that does not qualify for rollover treatment in your linked article is talking about when the loan no longer qualifies for the distribution exception, such as when the loan balance exceeds $50,000, or the loan takes longer than 5 years to repay. As the article explains, the loan balance is still considered a part of the 401(k), even though for tax purposes the participant has to pay tax on it. The deemed distribution is for tax reporting purposes only, because it really was not a distribution. That is why it is not an eligible rollover distribution, because it is still considered money that belongs to the 401(k) under the terms of the loan.

In other words, you can't roll something over until it is actually no longer a part of the original account balance.

On the other hand, a 401(k) that is cashed out no longer has any money in the account balance. Nothing in IRS Pub 575 says the outstanding loan balance can't be rolled over under the circumstances. Technically it is not a deemed distribution because the loan did not exceed $50,000 nor take longer than 5 years to repay. But it is still considered a distribution because the 401(k) was cashed out, in which case you have 60 days from the date the loan is considered distributed to the date it must be rolled over into a new qualified plan or IRA.

If anyone has any other citation to contradict what I just said, I would be glad to see it.

I think Bees has this covered in agreement with the IRS.

Reg. §1.72(p)-1 Q-12: Is a deemed distribution under section 72(p) treated as an actual distribution ...
A-12: No; ... Similarly, the deemed distribution is not eligible to be rolled over to an eligible retirement plan ...

Reg. §1.72-(p)-1 Q&A13 PLAN LOAN OFFSET. In the event of a plan loan offset, the amount of the account balance that is offset against the loan is an actual distribution for purposes of the Internal Revenue Code, not a deemed distribution under section 72(p).

Reg. §1.402(c)-2 Q&A9 Q-9: What is a distribution of a plan loan offset amount, and is it an eligible rollover distribution?

A-9: (a) General rule.
A distribution of a plan loan offset amount, as defined in paragraph (b) of this Q&A, is an eligible rollover distribution .... Thus, an amount equal to the plan loan offset amount can be rolled over by the employee (or spousal distributee) to an eligible retirement plan within the 60-day period ...