No. There is no penalty on a 5329, but the distribution to pay the loan is taxable. With code M, you can replace that amount as part of the rollover with other funds and roll the entire amount tax free. You have until the due date of the return (now Jul 15) to do that (or the extended due date, Oct 15, if a timely extension is filed).
**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
