topic 401K loans age 55 in Retirement tax questions

401K loans age 55

Wareagle2015 — Sat, 01 Jun 2019 00:53:26 GMT

I have a question concerning 401K loans and separating from your current job at age 55? I am thinking about changing jobs on November 15th, 2016, in this calendar year I also turn 55. I have a 401k loan that I may not be able to pay back. Can I use the rule of 55 to avoid paying the 10% penalty? Also if I do not pay the loan back and assuming the separation date is November 15 and the 60 day loan payback period ends in January 2017, in what tax year would the distribution take place? Would it be 2017 at the end of the grace period or 2016 on the day of separation?

Correct, the distribution will not be subject to the addi...

Opus 17 — Sat, 01 Jun 2019 00:53:27 GMT

Correct, the distribution will not be subject to the additional 10% penalty. It will be subject to normal income tax.

You will have to ask the plan administrator what effective date they will use when reporting the distribution. Probably the date of separation, but you need to ask them.

Since you will have separated from service, the loan will...

dmertz — Sat, 01 Jun 2019 00:53:27 GMT

Since you will have separated from service, the loan will be satisfied by making an offset distribution. This is essentially the same a distribution paid to you which is immediately turned around and used to pay off the loan. How long the plan takes to process the distribution is somewhat a matter of plan procedures, but if you desire that the distribution take place in 2016, you can ask the plan to immediately make the offset distribution and they *should* be able to process the distribution by the end of the year. If you don't make an explicit request for the distribution, the timing will likely be dictated by plan procedures.

Note an offset distribution is eligible for rollover. If you can come up with the money by the 60th day following the date of the distribution, you can roll up to the amount of the distribution into another retirement account and continue to defer the taxes.