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d_fhend
New Member

I borrowed from my 401K 3 years ago. In 16 I rolled my 401K. The loan balance is showing as income in my return and upped me to another tax bracket. Is this correct?

 
6 Replies
Critter
Level 15

I borrowed from my 401K 3 years ago. In 16 I rolled my 401K. The loan balance is showing as income in my return and upped me to another tax bracket. Is this correct?

Yes the unpaid loan balance is taxed as a withdrawal since you could not have rolled over money that is no longer in the account ... you should have gotten a 1099-R with code 1 in box 7. 

dmertz
Level 15

I borrowed from my 401K 3 years ago. In 16 I rolled my 401K. The loan balance is showing as income in my return and upped me to another tax bracket. Is this correct?

Instead of code 1, the code in box 7 would be code 7 if you were over age 59½ at the time of the distribution from the 401(k).  If you were under age 59½ at the time of the distribution but you separated from service from the company that provided this 401(k) plan in or after the year in which you reached age 55, the code in box 7 would be code 2.
d_fhend
New Member

I borrowed from my 401K 3 years ago. In 16 I rolled my 401K. The loan balance is showing as income in my return and upped me to another tax bracket. Is this correct?

I am 52.  Even though there was no payout in 2016, this has moved me into a higher tax bracket. (Costing me an additional 5%.  Is there any other way to show this without moving me up in tax bracket?
macuser_22
Level 15

I borrowed from my 401K 3 years ago. In 16 I rolled my 401K. The loan balance is showing as income in my return and upped me to another tax bracket. Is this correct?

What code is in box 7.    Did you default on the loan  and they took the money to pay it back?

If you repaid the loan with funds from the 401(k) before rolling over the remainder than the loan repayment would be fully taxable just as if you took the distribution in cash and then used that cash to pay the loan.  There is no way to avoid the tax (and early distribution penalty) on a distribution.   The amount rolled over would not be taxable.
**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.**
dmertz
Level 15

I borrowed from my 401K 3 years ago. In 16 I rolled my 401K. The loan balance is showing as income in my return and upped me to another tax bracket. Is this correct?

Since the 401(k) permitted a distribution from the plan, it seems that the distribution occurred after separation from service, so the loan repayment should have been done with an offset distribution, reported with code 1 in box 7 of the Form 1099-R.  An offset distribution is equivalent to a payout that you receive from the plan that you immediately turn around to pay off the loan.  So you *did* receive a payout in 2016, and that payout is subject to tax an penalty unless you used money from another, non-retirement source to complete the rollover of the offset distribution within 60 days following the date of the offset distribution.  (Most people who have 401(k) loans do not have the money to complete the rollover of the offset distribution, so I suspect that you did not roll this portion over.)
d_fhend
New Member

I borrowed from my 401K 3 years ago. In 16 I rolled my 401K. The loan balance is showing as income in my return and upped me to another tax bracket. Is this correct?

Thanks
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