Solved: How do I claim my 401K loan repayments after I have been forced from my job? Monies being used to repay the loan have already been taxed.
Sign Up

Why sign in to the Community?

  • Submit a question
  • Check your notifications
or and start working on your taxes
Announcements
TurboTax has you covered during Covid. Get the latest second stimulus info here.
cancel
Showing results for 
Search instead for 
Did you mean: 
New Member

How do I claim my 401K loan repayments after I have been forced from my job? Monies being used to repay the loan have already been taxed.

The money that I borrowed wasn't taxed, when I contributed it, so, now if I repay the loan with taxed monies, won't I be getting taxed twice, the second time when I redraw it?
1 Best answer

Accepted Solutions
Level 15

How do I claim my 401K loan repayments after I have been forced from my job? Monies being used to repay the loan have already been taxed.

If you repay a loan that was never treat as a deemed distribution or an offset distribution and, therefore, the outstanding loan amount never became a taxable distribution, you are paying back with the loan money that you were never taxed on, pre-tax money.

If you repay the loan after defaulting and the loan becoming a deemed distribution on which you must pay tax, your loan repayments become after-tax basis in the plan.  When you eventually receive distributions from the plan, each distribution will be a prorated amount of taxable income and nontaxable basis.

Usually, though, when you have an outstanding loan and you leave the company and are therefore permitted to take regular distributions from the plan, the plan satisfies the loan by making an offset distribution, reducing the balance in the plan to your credit to satisfy the loan.  An offset distribution is taxable unless you roll the roll an amount equal to the offset distribution into another qualified retirement account.  For offset distributions that occurred prior to 2018, the rollover was required to be made within 60 days of the offset distribution, so it's too late to do such a rollover for an offset distribution that occurred before 2018.  For offset distributions that occur in 2018 or later, the deadline for doing a rollover of the offset distribution is the due date of your tax return for the year in which the offset distribution occurred, including extensions.  Of course you would need to come up with the money to complete the rollover because an offset distribution does not result in any money being paid to you since you already received the money as a loan.

View solution in original post

18 Replies
Level 15

How do I claim my 401K loan repayments after I have been forced from my job? Monies being used to repay the loan have already been taxed.

Level 15

How do I claim my 401K loan repayments after I have been forced from my job? Monies being used to repay the loan have already been taxed.

If you repay a loan that was never treat as a deemed distribution or an offset distribution and, therefore, the outstanding loan amount never became a taxable distribution, you are paying back with the loan money that you were never taxed on, pre-tax money.

If you repay the loan after defaulting and the loan becoming a deemed distribution on which you must pay tax, your loan repayments become after-tax basis in the plan.  When you eventually receive distributions from the plan, each distribution will be a prorated amount of taxable income and nontaxable basis.

Usually, though, when you have an outstanding loan and you leave the company and are therefore permitted to take regular distributions from the plan, the plan satisfies the loan by making an offset distribution, reducing the balance in the plan to your credit to satisfy the loan.  An offset distribution is taxable unless you roll the roll an amount equal to the offset distribution into another qualified retirement account.  For offset distributions that occurred prior to 2018, the rollover was required to be made within 60 days of the offset distribution, so it's too late to do such a rollover for an offset distribution that occurred before 2018.  For offset distributions that occur in 2018 or later, the deadline for doing a rollover of the offset distribution is the due date of your tax return for the year in which the offset distribution occurred, including extensions.  Of course you would need to come up with the money to complete the rollover because an offset distribution does not result in any money being paid to you since you already received the money as a loan.

View solution in original post

New Member

How do I claim my 401K loan repayments after I have been forced from my job? Monies being used to repay the loan have already been taxed.

I am still confused.  I took out a loan from my 401K.  I understand that 401K monies were not taxed when put into the account.  The loan money was not taxed when I borrowed it.  If I pay the loan back with income money that has been taxed; what is the point of paying back the loan?  My thought is; I will be taxed on those same monies when they are distributed to me in retirement, thus being taxed on the same money twice.  I have not defaulted on the loan, and I still have 27 more months to pay, basically $22k.  
Level 15

How do I claim my 401K loan repayments after I have been forced from my job? Monies being used to repay the loan have already been taxed.

You are in essence paying the loan back to yourself, where it continues to accrue earnings tax-deferred.
Level 15

How do I claim my 401K loan repayments after I have been forced from my job? Monies being used to repay the loan have already been taxed.

Level 15

How do I claim my 401K loan repayments after I have been forced from my job? Monies being used to repay the loan have already been taxed.

"what is the point of paying back the loan" If you do not, ti becomes immediately taxable, and subject to a penalty.
Level 15

How do I claim my 401K loan repayments after I have been forced from my job? Monies being used to repay the loan have already been taxed.

No you aren’t taxed twice.  You didn’t pay tax when you got the loan.  You are just replacing the loan amount.  
Level 15

How do I claim my 401K loan repayments after I have been forced from my job? Monies being used to repay the loan have already been taxed.

Unless you default on the loan and the outstanding loan balance becomes taxable, you are ALWAYS repaying the loan principle with the pre-tax money that you were loaned.  It doesn't matter how you shuffle the loan dollars with other dollars because money is fungible.

The ONLY money that is taxed twice is the INTEREST that you pay to your 401(k) on the loan.  You pay the interest with after-tax money and it becomes pre-tax money when paid to the 401(k).
Level 15

How do I claim my 401K loan repayments after I have been forced from my job? Monies being used to repay the loan have already been taxed.

OP seems hung up on the fact that he is paying the loan back with after tax dollars, But he could just as easily be paying it back from nontaxable income (a gift, child support, an inheritance).  The source of the funds to repay is irrelevant.
Level 15

How do I claim my 401K loan repayments after I have been forced from my job? Monies being used to repay the loan have already been taxed.

@dmertz Great explanation!
Level 15

How do I claim my 401K loan repayments after I have been forced from my job? Monies being used to repay the loan have already been taxed.

There's a persistent Internet myth that (in the absence of a default) the 401(k) loan principle is paid back with after-tax money, but that's simply not true.  The 401(k) loan principle is paid back with the money that was loaned no matter where the money moves between the time it was loaned and the time is paid back.
Level 15

How do I claim my 401K loan repayments after I have been forced from my job? Monies being used to repay the loan have already been taxed.

Right - "repay" means to "pay back" with the same money that was loaned.   Of course any interest must come from other sources since the interest was not loaned - only the principle was loaned.
**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.**
Level 15

How do I claim my 401K loan repayments after I have been forced from my job? Monies being used to repay the loan have already been taxed.

New Member

How do I claim my 401K loan repayments after I have been forced from my job? Monies being used to repay the loan have already been taxed.

I thank you all for your answers.  I do understand now.  I am past full retirement age, so I wouldn't incur a "penalty" for the withdrawal.  SweetieJean, I found the links you included to be a very good explanation.  I guess it is all about "how" you look at the money you are repaying.  If I didn't have the loan, I wouldn't have had "that" money.  "That" tax free money is invested in my home, so, I will have to pay the loan money back with "taxed" dollars, which would have otherwise been used to invest in my home.  Hope that makes sense.  Once again, thank you all for your answers.
Dynamic Ads
v
Privacy Settings