If a participant loan doesn't satisfy the 5-year, quarterly payment requirement, the entire loan is taxable, including a loan that is within the dollar limit. For example, a $60,000 non-principal residence loan would trigger a $10,000 deemed distribution. If a participant loan is in excess of the maximum amount allowed, only the excess portion is taxable.
A failure to repay the loan may result in additional tax consequences and, in some cases, a prohibited transaction. A deemed distribution differs from other distributions in that the participant is taxed as if the distribution were received, but the treatment of the loan as a distribution does not excuse the participant from the obligation to repay the loan.
This web page focuses on the tax rules under IRC Section 72(p).Ī plan loan is a taxable distribution unless the loan satisfies the exception under IRC Section 72(p)(2) which sets limits on the amount of a nontaxable loan and the repayment of the loan.
#Turbotax loan treated as deemed distribution code
When a plan makes loans available, there are two important statutory requirements to consider: Internal Revenue Code (IRC) Section 72(p) dealing with taxability of participant loans and IRC Section 4975(d) dealing with prohibited transactions. Of course you would need to come up with the money to complete the rollover because an offset distribution does not result in any money being paid to you since you already received the money as a loan.Many employers make participant loans available in their retirement plans. For offset distributions that occur in 2018 or later, the deadline for doing a rollover of the offset distribution is the due date of your tax return for the year in which the offset distribution occurred, including extensions. For offset distributions that occurred prior to 2018, the rollover was required to be made within 60 days of the offset distribution, so it's too late to do such a rollover for an offset distribution that occurred before 2018. An offset distribution is taxable unless you roll the roll an amount equal to the offset distribution into another qualified retirement account. Usually, though, when you have an outstanding loan and you leave the company and are therefore permitted to take regular distributions from the plan, the plan satisfies the loan by making an offset distribution, reducing the balance in the plan to your credit to satisfy the loan. When you eventually receive distributions from the plan, each distribution will be a prorated amount of taxable income and nontaxable basis. If you repay the loan after defaulting and the loan becoming a deemed distribution on which you must pay tax, your loan repayments become after-tax basis in the plan. If you repay a loan that was never treat as a deemed distribution or an offset distribution and, therefore, the outstanding loan amount never became a taxable distribution, you are paying back with the loan money that you were never taxed on, pre-tax money.
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