topic I used a 401k withdrawal to payoff a loan in the same account which was from my previous employer. How do I report the offset 401k loan payoff on my tax return? in Retirement tax questions

I used a 401k withdrawal to payoff a loan in the same account which was from my previous employer. How do I report the offset 401k loan payoff on my tax return?

cnauerd — Tue, 03 Feb 2026 10:34:07 GMT

I'm looking to avoid the 10% penalty as I'm 56

Re: I used a 401k withdrawal to payoff a loan in the same account which was from my previous empl...

SharonD007 — Sun, 16 Feb 2025 19:16:21 GMT

You don't report an offset 401(k) loan payoff on your tax return. The 401(k) withdrawal that you took to pay off a 401 (k) loan is a distribution. Since you are under the age of 59 1/2 you will incur the 10% penalty.

Refer to the IRS Topic Considering a loan from your 401(k) plan? and the TurboTax article What happens if I have a 401(k) loan but later lose or quit my job?

Re: I used a 401k withdrawal to payoff a loan in the same account which was from my previous employer. How do I report the offset 401k loan payoff on my tax return?

cnauerd — Tue, 18 Feb 2025 18:47:10 GMT

Thank you for the response! I had a followup question...my Fidelity plan lists IRS code M which is "Qualified plan loan offset". Are there any cases where my payoff of my loan with a withdrawal from the same account would qualify as an offset and therefore not trigger the 10% penalty? I was laid off in 2023 and did this transaction in 2024.

Re: I used a 401k withdrawal to payoff a loan in the same account which was from my previous empl...

JamesG1 — Wed, 26 Feb 2025 00:12:30 GMT

Did you receive a 2024 IRS form 1099-R that reported the distribution that was the 401(k) loan payoff? It sounds like the issuer of the IRS form 1099-R could be reporting the code M on the form.

IRS Plan Loan Offsets states:

The instructions further require that a QPLO should be reported as one would any other actual distribution.

In addition, the administrator would enter Code M in box 7 of Form 1099-R.

Plan administrators must report any QPLOs on Form 1099-R for QPLO distributions made in 2021 and later.

Re: I used a 401k withdrawal to payoff a loan in the same account which was from my previous empl...

cnauerd — Wed, 26 Feb 2025 15:39:57 GMT

My 1099R form from Fidelity listed 1 on box 7 and not M. If I paid off the loan amount with the withdrawal, should it be coded as M? If it should, do I need to reach out to Fidelity for a revised 1099R?

Re: I used a 401k withdrawal to payoff a loan in the same account which was from my previous empl...

Opus 17 — Wed, 26 Feb 2025 16:01:24 GMT

@cnauerd

Your question makes no sense and you changed your answer on whether there is a code 1 or code M in your 1099-R.

Let's start with the basic rules. If you leave the company with an outstanding 401k loan, you have 60 days to repay it. If you miss that deadline, the amount of outstanding balance is considered an "offset distribution" and should be reported with code M. In other words, the money you kept is considered a distribution (withdrawal), and you pay tax on it because you did not pay tax when you originally borrowed the money. You also pay a 10% penalty unless you were 55 or older when you separated from service. You should have gotten a 1099-R with code M for the offset distribution for the 2023 tax year.

That is normally the end of the story. Your loan is converted to a withdrawal and you pay taxes on it. There is no requirement for repaying it.

You have the option of "repaying" the loan from other funds by making a payment to the original plan or to a new plan, including a private IRA, by the tax deadline of the year you separated from the company (so, April 15, 2024 or October 15, 2024). This is considered a special type of rollover, and it makes the offset distribution non-taxable. Normally, if it is after the 60 days, but before the tax deadline, you have to make the rollover to another account like an IRA or a new employer's 401k, because the old 401k usually won't take the rollover after 60 days. All this would be reported on your 2023 tax return.

It makes absolutely no sense to withdraw money from plan A to repay an offset distribution from plan A. But, assuming you did that, then this is what I expect should have happened:

1. You get a 1099-R in January 2024 for the 2023 offset with code M.

2. You withdraw money in 2024.

3. You repay the loan in 2024.

4. You report on your 2023 tax return that you got the 1099-R for the offset, and that you rolled over the funds by repaying the offset before the tax deadline. You would owe no tax for the offset distribution on your 2023 tax return.

5. You get a 1099-R in January 2025, for the 2024 withdrawal with code 1 (normal distribution). This is taxable income on your 2024 return, and is also subject to the early withdrawal penalty unless you are either age 59-1/2 or older; or you were age 55 or older when you separated from the company.

In Turbotax, after entering the 1099-R, keep going through all the following screens, don't jump to someplace else. Eventually there should be a page that asks "Let's look for some exceptions that can reduce the penalty" and one of the choices should be, you withdrew money from a qualified workplace plan after separation at age 55 or older.

Re: I used a 401k withdrawal to payoff a loan in the same account which was from my previous empl...

DavidD66 — Wed, 26 Feb 2025 16:39:15 GMT

It doesn't sound like your distribution to pay a 401(k) loan off was a Qualified Plan Loan Offset. A plan loan offset occurs when a participant's account balance (or accrued benefit) is reduced to pay a defaulted loan. This may occur when the terms governing a plan loan require that the loan be repaid immediately or treated as in default as a result of certain events, such as an employee's termination. If it was a QPLO, the only benefit is the extended rollover period. If you think your distribution should be reported as a QPLO, then you can contact Fidelity and request that they issue a corrected Form 1099-R.