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New Tax Reform Bill: Loan Rollover Rules Impacted

John Nownes,

December 27, 2017

Retiring Your Way

Articles

President Trump, on December 22, signed a tax reform bill into law that is the most significant overhaul of the federal tax code since 1986. The new tax law, however, leaves the retirement plan tax rules largely unchanged.

When tax reform efforts began, pension practitioners were concerned that legislation might reduce overall contribution limits, or cause the “Rothification” of plans by requiring participants to make Roth deferrals, rather than pre-tax deferrals, to 401(k) plans.

The only direct change to employer-sponsored retirement plans made by the new tax bill involves the ability of a participant to roll over a loan offset amount. The following example explains the issue:

  • Participant has a $100,000 vested account balance in her employer’s 401(k) plan, $20,000 of which consists of an outstanding loan.
  • Participant terminates employment and directly rolls over the $80,000 non-loan portion of her account balance to an IRA. She does not pay off the $20,000 loan balance, which is offset against her total distribution amount. The tax implications of the distribution are as follows:
    • Participant is not taxed, and no federal or state income taxes are withheld, on the $80,000 direct rollover amount.
    • Participant is taxed on the $20,000 loan offset amount (and may pay a 10% premature distribution penalty if she’s under age 59-1/2).
  • Current Law. Under current law, the participant can avoid being taxed on the $20,000 loan offset amount by contributing $20,000 of non-plan assets to her IRA (or an employer-sponsored plan) within 60 days of receiving the 401(k) plan distribution.
  • New Law. Under the new tax law, effective January 1, 2018, the participant would have until the due date of her tax return (plus extensions) to roll over the loan offset portion of the distribution. In other words, if participant received the 401(k) plan distribution in January 2018, she would have until April 15, 2019 (or later if her tax return is on extension) — not the current 60-day period — to roll over the $20,000 loan offset amount to an IRA (or an employer-sponsored plan).

This change was an attempt to address “retirement plan leakage” issues, and to help participants maintain their retirement savings. If you have any questions about the new law, please contact our Retirement Plan Services team.

 

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I took out a loan against 401k about 2 years ago. I retired Jan. 3, 2018. Do I qualify under the new tax law? Or is it only for loans that were taken out from 401k starting 2018?

Hi Sonya, someone from our Retirement Plan Services area will be following up soon to assist you. Thanks for reading and posting!

I have left my employer and have a $20k outstanding loan on my 401k. Principal is telling me I have to pay the loan back within 60 days or they will send me 1099 next Jan. Also, my ‘plan’ requires me to leave the money in that account for 1 year until 3/31/19.
Under new tax law and my situation, does this mean I can roll my 401k monies plus paid back loan money into IRA between 3/31/19-4/15/19 and not be hit with taxes on the loan?
If so, what do I do with the 1099 when I file my taxes?

I took out a loan against 401k about 2 years ago. Im resigning June 1st. Do I qualify under the new tax law? Or is it only for loans that were taken out from 401k starting 2018?

Thanks for explaining the new law, this is very helpfull. I have one question: I took out a loan against 401k about 1 year ago. I switched jobs in February of this year. Do I qualify under the new tax law? Or is it only for loans that were taken out from 401k starting 2018?

This blog article is for informational purposes only, and is not an advertisement for a product or service. The accuracy and completeness is not guaranteed and does not constitute legal or tax advice. Please consult with your own tax, legal, and financial advisors.


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