If money was withdrawn from a 401k, and then used to pay off a loan from the same 401k. Is this taxable?

[cyberdood]

I see there are provisions for returning the money to the same account but since this was a 401k loan that was being payed off, it wasn't exactly directly returning the money to the account.

[dmertz · Accepted solution]

Yes, that's taxable income of the amount shown in box 2a of the Form 1099-R.  It is not a rollover.

[cyberdood]

One more caveat. I see Turbo Tax lists provisions for emergencies and they have an other category. I did originally withdraw the money from my 401k for an emergency (unforeseen septic system replacement). We ended up selling the house and rolling in the repairs with the proceeds of the sale. At the time I didn't think to just put the money back and I had the 401k loan taken out so decided to pay it off instead. All of this happened within 60 days of withdrawal.

I'm guessing even though I withdrew the money for "an emergency/unforeseen cost", since I didn't end up using the money for the emergency, then that provision is not relevant???

And BTW, taxes were withheld on withdrawal, I'm mainly trying to avoid paying the 10% penalty. 🙂

[dmertz]

Cash is fungible, so if you paid an emergency expense, even though it might have been paid with "other" cash I would think that the exception would apply.  The emergency-expense exception would apply to a maximum of $1,000, so it would save you $100 of penalty at most.

[cyberdood]

OK, I read about the $1,000 maximum. What worries me is when I don't put an amount  in the emergency field, my federal tax bill is ~4k. When I put the amount that was allocated for the emergency, my tax  bill goes down to $800. Do you think I'm only supposed to put $1000 in that field being that it is the maximum?

[dmertz]

TurboTax will apply the exception to whatever amount is entered but Smart Check will flag an error and will not allow you to e-file until you reduce the entry to $1,000 or less.  (TurboTax should flag the error immediately upon making the entry, but doesn't.)

[cyberdood]

OK, I confirmed that is the case. Thanks for the help.