401(k) loan, default and repayment

[Lynn EA USTCP in Louisiana]

New client (nonfiler type). In 2002 took out loans from her 401(k) and defaulted on the payments. Received a 1099R for the default for 2002. But in 2006 she wanted to take out another loan and the administrator required that she repay the loan (the one that had been defaulted and for which a 1099R had been issued in 2002) before getting the 2nd loan. Oh, and she defaulted on the 2nd loan too (no surprise there, huh?).

I expect to be able to show the repayment as a deduction against AGI (line 21). Or is it properly shown as an itemized Schedule A deduction?

I've never had this issue come up before. Anyone else have words of wisdowm to impart?

Thanks,

Lynn Jacobs, EA, NP

Kenner, LA

[Lynn EA USTCP in Louisiana]

My research concludes that the repayment of he 'defaulted' loan, for which a 1099-R had been issued in a prior year, results in no deduction in the year repaid (see IRS Notice 82-22). However, that amount becomes basis for the 401(k), so that when MRD's have begun, it is not taxed again.

I'd appreciate hearing if anyone has come to a different conclusion. I'd appreciate hearing if anyone concurs with my conclusion.

Lynn Jacobs, EA, NP

Kenner, LA

[kcjenkins]

I agree with Lynn. The thing is, she took money out as a loan, which when she defaulted was treated as a distribution. That reduced her basis in her 401K. However, the rules allowed her to repay the loan, even after the default, which does not give her a deduction [she got the deduction back when she contributed to the 401K originally] but does increase her basis by that amount.