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I have a unique...

I have a unique situation and have not found a comprehensible explanation for: My wife took out a 17,000 loan against her 401 K. and was paying with bi-weekly payments from her check. She went on disability in October 2016. We never got any documents about what to do about the loan. She was terminated from her job in August the She passed away in September 2017. I got a payment book in her name from Fidelity but no one could give me info on where the payments went. Around this time, I changed her 401 K into my name, then weeks later, transferred into an IRA. I was informed that the loan would be treated as a distribution. I have heard form several people, that I could in fact make a 60 day rollover into the IRA that would, in essence, offset the tax consequence of the loan distribution. I think that how the 1099-R will be coded (IE death) vs. (IE. deemed distribution) would affect whether or not I can do this move. If this is indeed correct, my other issue is the 60-day window started on 11/16/17 and the 1099 will not be generated until after the deadline. How should I handle this situation?

Accountant's Assistant: The Accountant will know how to help. Is there anything else important you think the Accountant should know?

I think that is it for now.

Submitted: 3 months ago.Category: Tax
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1/5/2018
Tax Professional: Dr. Fiona Chen, Certified Public Accountant (CPA) replied 3 months ago
Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 944
Experience: Former IRS Revenue Agent
Verified

Dear Customer,

The 60 day limit is not set in stone. Below is on how the IRS will ease the deadline and how this can be done. The link below is IRS Rev Pro 2016-47. So, if you would like to pay back and not have to pay tax on the distribution, it is suggested that you contribute the remaining loan amount to your roll over IRA as soon as possible. However, allow me describe what should be and what can be and some pros and cons for your information and decision making.

https://www.irs.gov/pub/irs-drop/rp-16-47.pdf

"She was terminated from her job in August " 2017 is the key. When loan is not paid back on the day of termination, it is regarded distribution on the date of distribution to your wife. The 1099 should be issued to her as 1099-R. She was terminated prior to her passing.

Theoretically speaking, this amount which needed to be paid back has passed the 60 day limit.

However, the plan administrator, Fidelity, provided her with a payment book. That is, it is likely that they allowed her to continue the periodic payment beyond her termination date when the payroll deduction is no longer possible.

Therefore, the 60 days should start from her last payment to her plan. Because the payment book is issued to her, the last possible date for her to pay back loan would have been started in September 2017.

According to the Rev. Pro., you did have reasonable cause for you to miss the 60 day due to her passing and all the arrangements you needed to attend. You also made reasonable actions to find answer about what you can and should do.

If the 1099R is issued correctly, it should not be for the reason of death but regular distribution with early distribution (if she was less than 59.5 years old.) Usually, the death distribution is issued to the heirs. The regular 1099R is issued to her. Because it was her loan and you actually did not receive anything (cash), it would be more reasonable to assume that the 1099R should be issued to her.

Well, therefore, if you put money into your rollover IRA account, you should not have a problem. Print out this answer or make a copy of it for your file copy, too. Explain to your return preparer next year. The 1099R should not be taxable.

However, there is a potential benefit and reason for you to recognize income instead of roll over to avoid the income tax.

That is, the year of 2016 is the year you can still file Married Filing Jointly. Therefore, based on your taxable income and tax rate of 2016, it could be beneficial to recognize income on the remaining, unpaid balance on this retirement loan and distribution than deferring the tax to a later year.

Below link and quote are IRS source on how we can payback through contribution to the new rollover IRA account.

Please feel free to follow up.

Regards,

Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP, IMTA

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-loans

Loans to an employee that leaves the company

Plan sponsors may require an employee to repay completely a loan if he or she terminates employment. If the employee is unable to repay the loan, then the employer will treat it as a distribution and will report it to the IRS on Form 1099-R. The employee can avoid the immediate income tax consequences if he or she is able to come up with the loan’s outstanding balance, within 60 days and rolls over this amount to an IRA or eligible retirement plan.

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Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
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