Left my job with 401k loan

[ndp4949]

I left my job in February of this year.  My outstanding balance on my 401k loan is due at the end of this month. If I don't pay it back  at the end of this month the company I have the 401k with will just use $10k from my balance to pay it off.

I understand that I have until the filing deadline (so April of next year) to pay off an outstanding 401K loan, is that correct?  And if so, if the company uses the money from my balance to close out the loan, do I just add another $10K when I"m ready to pay it back, lets say in 6 months when I have the money?  Does it matter if I rollover the money to another custodian?

Thanks!

[JohnB5677]

I have found conflicting information on this, both from the IRS

You can not roll it over a 401K with a loan into an IRA.  IRAs (including SEP-IRAs) do not permit loans. If this transaction was attempted, then the IRA could be disqualified.

From: IRS Retirement Plans FAQs regarding Loans

Plan sponsors may require an employee to repay the full outstanding balance of a loan if he or she terminates employment or if the plan is terminated. If the employee is unable to repay the loan, then the employer will treat it as a distribution and report it to the IRS on Form 1099-R. The employee can avoid the immediate income tax consequences by rolling over all or part of the loan’s outstanding balance to an IRA or eligible retirement plan by the due date (including extensions) for filing the Federal income tax return for the year in which the loan is treated as a distribution. This rollover is reported on Form 5498.

From: IRS Retirement Topics - Plan Loans

I suggest that you contact a retirement specialist for more guidance.

A separate article indicates:  If you have a 401k loan and lose or leave your job, you have 60 days to repay it, or you will have to take that as a disbursement, which means you'll get a 10% penalty and pay income taxes on the funds

[dmertz]

Using part of your 401(k) balance to satisfy the loan is called an offset distribution.  The Tax Cuts and Jobs Act of 2017 changed the tax code to allow up until the due date of the tax return for the year in which the distribution occurs, including extensions, to roll over a qualified loan offset distribution.  Just make sure that the employer indeed treats this as an offset distribution and will include code M in box 7 of the 2022 Form 1099-R.  When entering this Form 1099-R into 2022 TurboTax you'll report as a rollover the amount repaid.

(The separate article to which JohnB5677 refers mentioning the 60-day deadline is apparently outdated with respect to offset distributions.)

[ndp4949]

Thanks so just to confirm if the 401k company treats it as an offset distribution I have until the due date for 2022 tax returns to pay it back. However if I were to take the 401k and roll it over to say a Vanguard IRA, I could still pay back the $10k by the due date OR should I keep my 401k where it’s at to avoid any confusion of

the Payback of the offset distribution?

[dmertz]

You can roll the offset distribution over to any qualified retirement account, including to a traditional IRA, so there is no need to avoid rolling over the rest of the 401(k).  You can complete the rollover to the Vanguard IRA if you like.  If rolled over after the normal 60-day rollover deadline, which is the case here, be sure to tell the receiving IRA custodian that it's a rollover of an offset distribution because there are special reporting requirements on Form 5498 for this sort of rollover.

[DianeW777]

It depends. The repayment is 'until the due date of the tax return for the year in which the distribution occurs'.  If the distribution was taken in 2022, then you have until the due date of your 2022 tax return to make the loan repayment.  However, if the distribution was taken in 2021, then you have until April 18, 2022 to make the repayment or to roll over a qualified loan offset distribution.

Also since you quit, and no longer work for this employer, you should check the rules for actions on the 401(k) when an employee leaves the company.  In other words to confirm whether the company can choose to consider the loan as a disbursement.  This will help determine whether you should leave it in place until repayment or if you should roll it over to an IRA.

Consider the advice provided by @dmertz as well; reporting the 1099-R next year and the codes the company will use when and if they issue it.

• 'Just make sure that the employer indeed treats this as an offset distribution and will include code M in box 7 of the 2022 Form 1099-R.  When entering this Form 1099-R into 2022 TurboTax you'll report as a rollover the amount repaid.'