topic Re: 401K default / offset in Retirement tax questions

401K default / offset

stp — Wed, 09 Oct 2019 15:12:33 GMT

I separated from my company in June with a 401k loan (in good standing) for a new house, about a $40,000 balance left. My new company did not allow me to start my new 401k until the quarter beginning Oct 1 2019. When I went to rollover the loan, I found out it defaulted on the last day of September, and would be offset.

Can I write my new 401k a check for $40,000 to avoid state / local / early withdrawal taxes? Or am I out of luck since I "defaulted"?

Re: 401K default / offset

dmertz — Wed, 09 Oct 2019 16:07:56 GMT

Beginning with 2018, you have until the due date of your tax return, including extensions, to come up with the money and complete a rollover of the offset distribution to a qualified retirement account. (Prior to 2018 the rollover had to be completed within 60 days of the offset distribution) That account can be the 401(k) of the new employer, if the plan will accept the rollover, or to an IRA. Since the offset distribution occurred in September 2019 and will be reported with code M on the 2019 Form 1099-R (along with code 1 if you were under age 55 in 2019 or code 2 if you were otherwise under age 59½), you have until October 15, 2020 to complete the rollover (assuming that you request a filing extension for your 2019 tax return).

Re: 401K default / offset

stp — Wed, 09 Oct 2019 16:25:22 GMT

Thanks. One question - since the offset is much greater than a contribution limit, can I still deposit that big amount into an IRA?

Re: 401K default / offset

dmertz — Wed, 09 Oct 2019 16:48:16 GMT

Rollover contributions are not subject to the annual limits that apply to regular contributions. Provided that none of the offset distribution is a Required Minimum Distribution from the 401(k) because you are age 70½ or over in 2019, the entire offset distribution is eligible for rollover.

The 401(k) plan at your old employer was required by law to provide you with an explanation of your rollover options (unless you waived that obligation).

Perhaps you can roll your old 401(k) over to the new employer's 401(k), obtain a loan from the new employer's 401(k) and use the loan proceeds to complete the rollover of the offset distribution. I'm not sure that this loan would qualify for a loan term of more than 5-years, though, because the loan is being used to fund the rollover of the offset distribution, not fund the acquisition of the home.