401k Loan Issue, what to Do?

I have a client that wants to roll $230k, his 401k, into an IRA, problem is
He has a 10k loan on it with no way to repay it now that he will be leaving in 30 days.
Couple of questions, what happens if he cant pay back the loan?
Can that hold back the rollng over of his account?
What other implications should he be concerned about?
 
Long story short he will have to either pay back the loan or pay taxes on it.

You are not allowed to keep the loan after you separate from service. You have 60 days to pay it back after you separate. If not, it counts as income for the year. If under 59.5 you also get the 10% penalty.

Basically a Loan becomes a distribution 60 days after you separate from service, or when you transfer the funds out of the 401k plan.
 
The client isn't separating service, their company got bought out by a huge conglomerate and they are ending the plan and bringing their's in. The client doesn't like the options they have, so I recommended an IRA rollover to him.

Question: He can't do a partial rollover to the new employer plan with the loan attached?

Question: So the loan counts as income, that he will have to pay taxes on and a Federal 10%. So basically he doesn't have to pay anything out of pocked up front, only at the end of tax season (when the income counts for tax purposes)?

Question: Can he do a rollover into an IRA even with the loan, how does he close the loan out so he can roll over the balance? I don't want any snags with the paperwork...

Appreciate the help Tyler.
Ever come across a 401k rollover case like this aka outstanding loans?
 
The client isn't separating service, their company got bought out by a huge conglomerate and they are ending the plan and bringing their's in. The client doesn't like the options they have, so I recommended an IRA rollover to him.

Oh.... well that is a bit more complicated. It depends on what the new company is doing.

The client might say they are "ending the plan", but they are really doing 1 of 2 things:
1. Transferring old plan into new plan. Usually the loan would transfer as well.
2. Ending old plan and having employees cash out of it.

If #1 is happening then he most likely cant Transfer out of the 401K (unless he is 59.5 and the plan allows for in-service withdrawals)

If #2 is happening then he should be able to Transfer to an IRA.

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Question: He can't do a partial rollover to the new employer plan with the loan attached?


It depends on if the plan is being closed out, or if it is Transferring to the new plan. Even if it is Transferring to the new Plan it depends on the situation, but most of the time the loan will transfer to the new plan.

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Question: So the loan counts as income, that he will have to pay taxes on and a Federal 10%. So basically he doesn't have to pay anything out of pocked up front, only at the end of tax season (when the income counts for tax purposes)?


Correct. It just counts as income for the year. So end of year he will get a 1099R to file with his taxes that has his retirement income (the loan) for the year, plus any applicable penalty taxes. It just gets wrapped up in his yearly taxes.

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Question: Can he do a rollover into an IRA even with the loan, how does he close the loan out so he can roll over the balance? I don't want any snags with the paperwork...


If he is allowed to Transfer to an IRA then he has 2 options:

1. Pay back the loan before Transferring.

2. Dont pay back the loan, get the 1099R end of year, and let it count as income for the year.

There is really nothing for you to do either way. If he transfers out he will have 60 days to pay it back to the 401k provider. If he doesnt then they will just send him a 1099R for it showing it as income for the year.

So there is really no "closing out the loan" unless he pays it back. If he transfers it just becomes income after 60 days. Loans cant transfer to IRAs. So it just stays with the 401k (a good way to think of a Loan is that it is a pending withdrawal unless paid back).

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Appreciate the help Tyler.
Ever come across a 401k rollover case like this aka outstanding loans?

No problem. He needs to find out from HR if the old plan is being transferred into the new plan, or if is being wound down/cashed out.

And I have had one or two that had a loan they paid back before transferring out. But never this particular type of situation.
 
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So if you transfer all the money out and leave the loan, do they just automatically close the account? How long does it the account stay open-empty-with a loan on it, 30 days? 60 days? closed immediately after all funds have been rolled out?
Thanks Tyler for the help.
 
So if you transfer all the money out and leave the loan, do they just automatically close the account? How long does it the account stay open-empty-with a loan on it, 30 days? 60 days? closed immediately after all funds have been rolled out?
Thanks Tyler for the help.


The account is closed when you Transfer out. The Loan basically does not exist anymore at that time. A 401k Loan only exists while you are enrolled in that specific 401k plan.

When he Transfers out the Loan will cease to exist. Interest will stop being charged, and he will get a letter stating that he has 60 days to pay it back or it will count as income.

Basically a Loan is just a pending Withdrawal. If its not paid back in 5 years or within 60 days of leaving the plan it is then classified as a Withdrawal.
 
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