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jafox01
Returning Member

1099r loan default but I paid back in full before it was time to file taxes

Last year, I borrowed $12,000 from my 401k in August 2021. It defaulted because I no longer worked at the employer and had no way of making payments. I was able to pay the loan off in full $12,128.55. When I asked the employer/holder of the account for an updated 1099r form to reflect this without penalty, they just sent a letter stating that it is paid in full. Do I still file the 1099r on  my taxes even though it is paid in full and no longer considered a taxable income?

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5 Replies

1099r loan default but I paid back in full before it was time to file taxes

Sorry, no.  The payoff from a 401(k) loan is not reported on a tax return. 

A Form 1099-R is only issued if you made a distribution from the account.  Since the loan was in default you should receive a 1099-R from the plan administrator for the distribution in 2021.

jafox01
Returning Member

1099r loan default but I paid back in full before it was time to file taxes

Sorry, I'm still a bit confused. I paid off the loan prior to the timeframe required. Since it was paid off, do I acknowledge this 1099r that is showing a tax penalty on my current taxes and file as is, or do I just disregard this 1099r form and keep the loan payoff letter with the 1099r form I was issued?

1099r loan default but I paid back in full before it was time to file taxes


@jafox01 wrote:

Sorry, I'm still a bit confused. I paid off the loan prior to the timeframe required. Since it was paid off, do I acknowledge this 1099r that is showing a tax penalty on my current taxes and file as is, or do I just disregard this 1099r form and keep the loan payoff letter with the 1099r form I was issued?


Once the loan goes into default the loan becomes a distribution and is reported as a distribution on the Form 1099-R probably with a code L in box 7 of the form.  Your payoff of the loan is not a factor.

 

Second opinion @dmertz 

jafox01
Returning Member

1099r loan default but I paid back in full before it was time to file taxes

Thank you!

dmertz
Level 15

1099r loan default but I paid back in full before it was time to file taxes

If you had not defaulted before your separation from service, this generally should have been handled as an offset distribution rather than a default.  If that was done, the loan would have been satisfied by the offset distribution, the Form 1099-R would include code M in box 7 and you would have until the due date of your tax return to come up with the money and roll it over to a qualified retirement plan like the 401(k) or to an IRA to allow continued deferral of taxes on the amount rolled over.

 

If the loan was instead considered defaulted and you were issued a Form 1099-R that included code L in box 7, the loan remained outstanding after the default but became taxable as indicated on the Form 1099-R.  In this case, subsequently paying off the loan is not a rollover and does not continue to defer the taxes on the defaulted amount but instead the repayment becomes after-tax basis in the 401(k).  Eventual distributions from the 401(k) will then be proportionate parts pre-tax and after-tax so that you don't pay tax twice on the defaulted amount.  You'll want to make sure that the 401(k) plan is tracking this after-tax basis properly so that future Forms 1099-R form the plan reflect the correct taxable amount.

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