Hi
One of my close relatives has a tax situation and would like to get some insights into this. He was working for a company and took a loan from 401K in October 2019. He left the company in April 2020. His loan balance of approximately $45,000 defaulted because he was not able to pay back in 90 days after quitting the position. He did join the same company in August and had been contributing to his 401K and IRA.
His tax liability right now is $11,000+. What options does he have to reduce the tax liability. It is my understanding that his option for paying back the amount in traditional IRA without any taxes and early withdrawal penalty is gone as it had been over a year since the loan defaulted. I believe that he has 90 days to contribute the money to a traditional IRA to avoid taxes and penalties. Based on my understanding, he can get an extension until October and contribute the loan amount to Roth IRA to avoid the 10% early withdrawal penalty. Are there any other options to reduce his tax liability and early withdrawal penalty? He can pay back the loan amount (or most of the loan amount) in the next 6 months. If paying back the amount to a traditional IRA is an option, that would great. Thank you very much!
