Pacun Posted January 9, 2015 Report Share Posted January 9, 2015 I have a client who was 59 on March 12, 2014 and quit his job after working full time for 30 years. On 12-23-2013 he quit his job and he had a (one) 401k loan with a balance of 40K. Fidelity sent him a letter on January 15th, 2014 stating that his loan was not paid and that the employer said that he was no longer employed with them. As a result, payroll deductions to pay for the loan was not an option and that full payment should be made within 30 days or the balance was going to be considered a distribution on Feb 14th, 2014. My client didn't pay the balance and therefore a he got a distribution on Feb 14th, 2014 for 40K. On June 17th 2014, he withdrew 10K from his 401k. On October 31st, 2014 he got another distribution for 20K from his 401k. At which time he was 59 and a half. He used all the money to have fun in Orlando, Las Vegas and Atlantic City. How much penalty IF ANY will he pay on his 2014 taxes? Thank you. Quote Link to comment Share on other sites More sharing options...
Pacun Posted January 9, 2015 Author Report Share Posted January 9, 2015 Please give me the figure without explanation and then we discuss it. Quote Link to comment Share on other sites More sharing options...
Lion EA Posted January 9, 2015 Report Share Posted January 9, 2015 If he withdraws from his 401(k) after separating from service and after turning 55, there is no additional 10% penalty. 1 Quote Link to comment Share on other sites More sharing options...
Pacun Posted January 9, 2015 Author Report Share Posted January 9, 2015 If he withdraws from his 401(k) after separating from service and after turning 55, there is no additional 10% penalty. So your answer is 0 Quote Link to comment Share on other sites More sharing options...
Lion EA Posted January 9, 2015 Report Share Posted January 9, 2015 Don't know if the IRS will use the same date as Fidelity for the outstanding loan/distribution of if they use the original date of the loan. But, for the distributions after separation/after 55, use 01 on Line 2, Form 5329 as the Exception to the 10% Penalty on Early Distributions. Read IRC Section 72(t)(2)(A)(v) 3 Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted January 9, 2015 Report Share Posted January 9, 2015 He may, however, owe a penalty for under withholding, unless he makes a timely estimated payment to cover the distributions.. 2 Quote Link to comment Share on other sites More sharing options...
mcb39 Posted January 9, 2015 Report Share Posted January 9, 2015 So your answer is 0 My answer is also 0 Quote Link to comment Share on other sites More sharing options...
Pacun Posted January 10, 2015 Author Report Share Posted January 10, 2015 How about if the Loan was taken before he was 55? Quote Link to comment Share on other sites More sharing options...
Lion EA Posted January 10, 2015 Report Share Posted January 10, 2015 That's the part I don't know. Does the IRS consider when the loan was taken or when it stopped being a loan/became a distribution? The real problem with the loan is not the 55 but that it originated before he separated from service. Read IRC Section 72(t)(2)(A)(v) and surrounding sections. Quote Link to comment Share on other sites More sharing options...
jklcpa Posted January 10, 2015 Report Share Posted January 10, 2015 because it was bugging me. I found the answer in Reg Sec 1.72(p)-1 in the Q & A section. Below are some excerpts that should help. The deemed distribution of $40K occurred on 2/14/14 and will be taxable in the 2014 year, not when the loan was made. Note that the references to the loan satisfying the requirements detailed in Q&A A-3 relate to the loan's terms meeting the IRS requirements, and this section does not apply to the OP's hypothetical scenario. (Note for anyone else reading this: there ARE times when the distribution would be taxable at the time the loan is made if it DOES violate the tax law as described in A-3, but this is NOT the case with OP's fact pattern). OP's answer and an example is found in A-10. PART 1—INCOME TAXES (CONTINUED) §1.72(p)-1 Loans treated as distributions.The questions and answers in this section provide guidance under section 72(p) pertaining to loans from qualified employer plans (including government plans and tax-sheltered annuities and employer plans that were formerly qualified). The examples included in the questions and answers in this section are based on the assumption that a bona fide loan is made to a participant from a qualified defined contribution plan pursuant to an enforceable agreement (in accordance with paragraph (b )of Q&A-3 of this section), with adequate security and with an interest rate and repayment terms that are commercially reasonable. (The particular interest rate used, which is solely for illustration, is 8.75 percent compounded annually.) In addition, unless the contrary is specified, it is assumed in the examples that the amount of the loan does not exceed 50 percent of the participant's nonforfeitable account balance, the participant has no other outstanding loan (and had no prior loan) from the plan or any other plan maintained by the participant's employer or any other person required to be aggregated with the employer under section 414(b ), (c ) or (m), and the loan is not excluded from section 72(p) as a loan made in the ordinary course of an investment program as described in Q&A-18 of this section. The regulations and examples in this section do not provide guidance on whether a loan from a plan would result in a prohibited transaction under section 4975 of the Internal Revenue Code or on whether a loan from a plan covered by title I of the Employee Retirement Income Security Act of 1974 (88 Stat. 829) (ERISA) would be consistent with the fiduciary standards of ERISA or would result in a prohibited transaction under section 406 of ERISA.Q-10: If a participant fails to make the installment payments required under the terms of a loan that satisfied the requirements of Q&A-3 of this section when made, when does a deemed distribution occur and what is the amount of the deemed distribution? A-10: (a) Timing of deemed distribution. Failure to make any installment payment when due in accordance with the terms of the loan violates section 72(p)(2)(C ) and, accordingly, results in a deemed distribution at the time of such failure. However, the plan administrator may allow a cure period and section 72(p)(2)(C ) will not be considered to have been violated if the installment payment is made not later than the end of the cure period, which period cannot continue beyond the last day of the calendar quarter following the calendar quarter in which the required installment payment was due. ( b ) Amount of deemed distribution. If a loan satisfies Q&A-3 of this section when made, but there is a failure to pay the installment payments required under the terms of the loan (taking into account any cure period allowed under paragraph (a) of this Q&A-10), then the amount of the deemed distribution equals the entire outstanding balance of the loan (including accrued interest) at the time of such failure. © Example. The following example illustrates the rules in paragraphs (a) and ( b ) of this Q&A-10 and is based upon the assumptions described in the introductory text of this section: Example. (i) On August 1, 2002, a participant has a nonforfeitable account balance of $45,000 and borrows $20,000 from a plan to be repaid over 5 years in level monthly installments due at the end of each month. After making all monthly payments due through July 31, 2003, the participant fails to make the payment due on August 31, 2003 or any other monthly payments due thereafter. The plan administrator allows a three-month cure period. (ii) As a result of the failure to satisfy the requirement that the loan be repaid in level installments pursuant to section 72(p)(2)(C ), the participant has a deemed distribution on November 30, 2003, which is the last day of the three-month cure period for the August 31, 2003 installment. The amount of the deemed distribution is $17,157, which is the outstanding balance on the loan at November 30, 2003. Alternatively, if the plan administrator had allowed a cure period through the end of the next calendar quarter, there would be a deemed distribution on December 31, 2003 equal to $17,282, which is the outstanding balance of the loan at December 31, 2003. 2 Quote Link to comment Share on other sites More sharing options...
Pacun Posted January 10, 2015 Author Report Share Posted January 10, 2015 The question no one asked was: Was the loan a personal loan or a residential loan? I forgot to say that this was a personal loan. So, what are the choices of personal loans? You can borrow up to 50K and max payment time is 5 years. So, In this case, there was no possible way that he owed 40K on a loan if he borrowed prior to being 55. That's why I chose 40K but I failed to say it was a personal loan. So there should have been no question that the loan was made after he was 55 and regardless of when the distribution took place, he was over 55 and now the only question was when the distribution took place. So if the distribution took place after he separated from service, then no penalty. JKLCPA got the correct answer from her research. I brought this question because about 4 years ago, a person took out about 60K from her 401k after she separated from service and she was 57. 1099-R came with code 1 and the preparer made her pay 6K in penalty. She came to me a year later and I called Fidelity and I demanded a corrected 1099-R. The representative started to be smart with me and I said: How did the distribution start its process? The representative said: "We sent her a letter because she could not continue in that plan because she was no longer with that employer." My next question was do you keep date of birth data of people in your 401K plans? and the representative said yes. I said, so you knew she separated from service and that she was older than 55, correct? The rep said yes. At that point, I said, I need you to correct the code on the 1099-R and please mail my client a corrected copy. When my client got the corrected 1099-R, we amended and got a 6K in refund. I am surprised I got the correct answers from the get go. That proves that this forum is the best. Quote Link to comment Share on other sites More sharing options...
jklcpa Posted January 10, 2015 Report Share Posted January 10, 2015 I am surprised I got the correct answers from the get go. That proves that this forum is the best. Is this another one of your hypothetical questions that are only meant to test us here to see if someone would arrive at the correct answer, or something you really didn't need help with? It seems like you already had the answer, and your statement really comes off as rather smug and insulting to say that you are surprised at the correct answers given here. 2 Quote Link to comment Share on other sites More sharing options...
Pacun Posted January 10, 2015 Author Report Share Posted January 10, 2015 What I meant is that sometimes we discuss a post for a while and until the end we get the best answer. In this case, I got the best answer from the very first post. Why will you get insulted? If you check most of the posts don't get the one best answer from the first post and in this case I did. Yes it is not a real life question. Detailed oriented people like you noticed that Saint Patrick's day, Father's day and Halloween dates were enter which would make this situation a bit more than a scenario rather than a real life situation. Did you like the warm up or not? 1 Quote Link to comment Share on other sites More sharing options...
jklcpa Posted January 10, 2015 Report Share Posted January 10, 2015 What I meant is that sometimes we discuss a post for a while and until the end we get the best answer. In this case, I got the best answer from the very first post. Why will you get insulted? If you check most of the posts don't get the one best answer from the first post and in this case I did. Yes it is not a real life question. Detailed oriented people like you noticed that Saint Patrick's day, Father's day and Halloween dates were enter which would make this situation a bit more than an scenario rather than a real life situation. Did you like the warm up or not? No, I don't like any of it or the fact that I wasted my time with you. Lion and I just had several posts back and forth about answering questions for others, trying to help, and not doing research for others. I had the time today, and when I have the extra time I don't mind helping others on here and elsewhere that actually need some help. I certainly don't need to do it, and don't get anything out of it. It is one of my ways of giving to this community, to try to bring this forum to a higher plane from the tone we had going last year, and to put to rest some of the comments made by a few that this forum is unprofessional. If you don't really need help and are posting hypotheticals, maybe you should mark them as such or find some other way to indicate that directly rather than making vague references to holiday dates within the post. 2 Quote Link to comment Share on other sites More sharing options...
mcb39 Posted January 10, 2015 Report Share Posted January 10, 2015 Is this another one of your hypothetical questions that are only meant to test us here to see if someone would arrive at the correct answer, or something you really didn't need help with? It seems like you already had the answer, and your statement really comes off as rather smug and insulting to say that you are surprised at the correct answers given here. I had the feeling all along that Pacun knew the answer and was testing us. However, I did try to find proof for the answer. Thanks Judy for supplying that for all of us. Quote Link to comment Share on other sites More sharing options...
Jack from Ohio Posted January 10, 2015 Report Share Posted January 10, 2015 I just finished taking all the testing I need. It was from the IRS. I don't need testing by anyone else, even if they think they are qualified to be testing others. 2 Quote Link to comment Share on other sites More sharing options...
jklcpa Posted January 10, 2015 Report Share Posted January 10, 2015 I just finished taking all the testing I need. It was from the IRS. I don't need testing by anyone else, even if they think they are qualified to be testing others. ...or simply baiting an audience...and for what purpose? 2 Quote Link to comment Share on other sites More sharing options...
Jack from Ohio Posted January 10, 2015 Report Share Posted January 10, 2015 I just finished taking all the testing I need. It was from the IRS. I don't need testing by anyone else, even if they think they are qualified to be testing others. ...or simply baiting an audience...and for what purpose? Not baiting anyone. Making a statement. If the shoe fits.... Quote Link to comment Share on other sites More sharing options...
jklcpa Posted January 10, 2015 Report Share Posted January 10, 2015 Not baiting anyone. Making a statement. If the shoe fits.... Jack, I meant Pacun was baiting us. Quote Link to comment Share on other sites More sharing options...
Jack from Ohio Posted January 10, 2015 Report Share Posted January 10, 2015 Jack, I meant Pacun was baiting us. DUH????? Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted January 10, 2015 Report Share Posted January 10, 2015 Come on, isn't it a little early to be being so sensitive? Personally, I think it was a valuable discussion, no matter why he posted it. I have no doubt in my mind that someone will learn a valuable lesson from reading it. Only thing he did wrong was the final post. If he'd just posted "Great answer, thank you so much for the cites." no one would have gotten their knickers in a knot, as my mother used to say. 1 Quote Link to comment Share on other sites More sharing options...
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