401k loan settled

[lstreet78]

I took out a 401k in Nov 2020 and was paying it back via automatic payroll deductions and then in Jul 2021, I was laid off from that job. When I rolled over my 401k from that job to an individual 401k at a different investment firm, they took the remaining balance owed on the loan from my total amount to roll over to settle the loan but I still received a 1099-R form. By them taking the balance due, does that null/void the 1099-R?

[ThomasM125]

The 1099-R is not nullified and must be reported on your tax return.

I believe you mean that they reduced the balance of your account by the amount you owed on the loan you took. So, you don't need to pay the loan back anymore. If so, then the amount of the loan that was cancelled is taxable to you. It is the same as if you took a distribution for that amount of money.

The 1099-R form should report the amount of money that was transferred to the new retirement account in box 1 and the amount in box 2(a) should be the amount of the loan that was forgiven.

[dmertz]

Since the portion used to pay off the loan appears to be a qualified loan offset distribution, you should have received two Forms 1099-R from the old 401(k), one for the amount rolled over to your new individual 401(k) (code G if done by direct rollover, otherwise code 1, 2 or 7 if paid to you) and the other for the offset distribution (code M, along with code 1 if you were under age 59½ or may code 7 of you were over age 59½).

With regard to a Form 1099-R that includes code M in box 7, you have until the due date of your 2021 tax return, including extensions, to come up with the money and roll it over to your new individual 401(k) or an IRA.

If the entire amount, including the offset distribution that satisfied the loan, was reported on a single Form 1099-R, contact the old plan to find out why the offset distribution was not reported separately with code M.