5.4 Pensions and Annuities: Loans & Other Retirement Account Transactions
I left a company where I had an outstanding loan through my 401(k)
and did not pay the loan back. How do I report this on my Form 1040?
You should receive a Form 1099-R reporting the outstanding loan as a distribution
from the 401(k) plan. This income is reported as ordinary income on line 16b
of Form 1040. If you are under the age of 59 1/2, you are also subject to
a 10 percent additional tax on early distributions from qualified retirement
plans unless you qualify for an exception listed in Publication 575, Pension
and Annuity Income. This 10% additional tax is reported on line 57 of
Form 1040. If you are subject to the 10 percent additional tax on early distributions
from qualified retirement plans and the Form 1099-R has code 1 in Box 7, write "no" on the dotted line next to line 57. If you are subject
to the 10 percent additional tax on early distributions from qualified retirement
plans and the Form 1099-R does not have code 1 in Box 7, you also need to
file Form 5329 (PDF), Additional Taxes on Qualified
Plans (including IRA's), and other tax-favored accounts..
References:
My understanding is that if I am over age 55 and default on a loan
through my 401(k) when leaving the company, the 10% penalty is forgiven. Can
you confirm that for me?
If you default on a loan from your 401(k), you are considered to have received
a distribution from your 401(k). Whether or not you will have to pay the
10 percent additional tax on early distributions from 401 (K) plan depends
on a number of factors, including your age.
In order to avoid the 10 percent additional tax on early distributions
from qualified retirement plans, the following all must be true:
you received the distribution after you left the company
you left the company during or after the calendar year in which you reached
age 55
your departure from the company qualifies as a separation from service
or, you must meet one of the other exceptions shown in Publication 560, Retirement
Plans for Small Business and Publication 575, Pension and Annuity
Income.
References:
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