Default on 401k loan

[JoshinNC]

I think I understand how this one works, but want to make sure.

Client has a 401k with old employer valued at $45,000. Client also has outstanding loan balance of $5900 on the 401k. Due to some extraneous circumstances client will have very low income in 2006 (less than $10,000).

He can rollover the current account value, default on the loan and pay income tax on the default via 1099-C. Is this right?

If so, I think it's a good strategy to get away from a $5900 balance for roughly $590 in tax. Also, I understand the default would not show on credit report? Is this correct?

This just sounds like a win-win for the client!

Please let me know if I'm missing something before I recommend this strategy!

[djack1040]

401K Loan

Given the low tax bracket, it might be a good strategy to payoff the loan when rolling over. As you noted, if the client is under age 55, he will be subject to the 10% early withdrawl penalty.

I would not use the term "default". This is his money and is merely a "distribution" when he pays off the loan.

[S T]

Outstanding Loan on Termination

I believe the transaction will be reported on a 1099R and then will provide you with the gross amount, taxable amount and your box 7 code, which will more than likely be a "1"

Sandy

[JoshinNC]

Thanks for the help

I did a little research, and it would be reported as a distribution on 1099R. Unfortunately, he fell about 3 months short of the age 55 rule.

Thanks for the quick responses!