An employee terminating their employment with a 401k loan still owed.

[Jeter2016]

I have a client who is 40 years old, terminated her employment and had a loan against her 401k with a balance of 32,000.00.
She has received a 1099R with the dollar amount of 32,000.00 in the taxable box, but the code in block 7 is an 8.
I realize that she has to pay tax on the 32,000.00 but does she also have to pay the 10% penalty?
I have never seen a code 8. I have seen 1L in block 7 but not 8.
So is she subject to the 10% penalty?
Many thanks,

[TAXNJ]

I have a client who is 40 years old, terminated her employment and had a loan against her 401k with a balance of 32,000.00.
She has received a 1099R with the dollar amount of 32,000.00 in the taxable box, but the code in block 7 is an 8.
I realize that she has to pay tax on the 32,000.00 but does she also have to pay the 10% penalty?
I have never seen a code 8. I have seen 1L in block 7 but not 8.
So is she subject to the 10% penalty?
Many thanks,

Look at the instructions on the back of form 1099-R for explanation of the codes.

[terryats]

Yes she is subject to the 10% penalty

[Rapid Robert]

Another example of why 401k loans should not be allowed. In this case, if she needed to borrow $32K from retirement savings, she never should have been making the contributions in the first place. There was a short time much earlier in my own prior career, where I suspended my own contributions to 401k and gave up the company match, because I needed the cash in my paycheck instead to avoid taking on short term debt. Didn't last long, and I would do it again, knowing what I know now.

It would be far better to simply allow early distributions from 401k (at full tax and penalty), so that people know up front what they are getting into. The loan route is just a coverup and a lie, in most cases. Or better yet, eliminate the needless complicating differences between 401ks and IRAs and just have one type of defined contribution retirement account per taxpayer, period. Now THAT would be tax simplification, if only Congresscritters had any courage.

[kathyc2]

. Or better yet, eliminate the needless complicating differences between 401ks and IRAs and just have one type of defined contribution retirement account per taxpayer, period. Now THAT would be tax simplification, if only Congresscritters had any courage.

I've been saying that for years. 401k, 403b, 457, traditional, roth, Roth 401k, SEP, SIMPLE- I bet there are well over a dozen different ones with slightly different rules. Cut it down to two options- one deductible and one non-deductible.