Can I repay back a 401k loan after leaving my job?

Forum|Forum|1 year ago
February 24, 2025
2 replies
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I left my job inApril 2024 and received a 1099 for distribution of 10k and I want to put the money back in a qualifying IRA that was set up with the remaining money in my 401k.

Best answer by dmertz

If the 2024 Form 1099-R includes code M in box 7 (seems like it should under the circumstances), you have until the due date of your 2024 tax return, including extensions, to come up with the fund, roll the amount over to an IRA and treat the qualified plan-loan offset distribution as a rollover.

dmertzAnswer

Employee

matrujiAuthor

I saw the answer and it makes sense but how do I input this into TurboTax because if I try to show as traditional IRA it says I don’t qualify.

Opus 17

Employee

@matruji wrote:

I saw the answer and it makes sense but how do I input this into TurboTax because if I try to show as traditional IRA it says I don’t qualify.

If you are repaying a loan offset distribution by rolling it over into an IRA, don't report it as a new IRA contribution. Instead, report it as a rollover. When you enter the 1099-R for the offset distribution, there should be a question like "What did you do with the money?" and one of the choices should be "I rolled over all or part of it into a qualifying plan." Make sure you run all the steps of the interview, don't just enter the distribution from the 1099-R and then skip to the next thing.

Opus 17

Employee

I want to ask an expert. @dmertz

Most of the time, you have 60 days to "repay" the loan by contributing funds to an IRA. This is reported as a rollover.

However, there was a law change in 2018 that gives you until the filing deadline (April 15, or October 15 if you have an extension) to complete a rollover for an "offset distribution".

(I will admit that I am confused over the difference between a "deemed distribution" which can't be rolled over, and an "offset distribution" which can be, although I'm pretty sure that a distribution due to leaving the job is an "offset" rather than "deemed" distribution, so it is eligible for rollover. Which is why I want to ask another expert.)

[Edited to add: dmertz beat me to it.]

dmertz

Employee

"I am confused over the difference between a "deemed distribution" which can't be rolled over, and an "offset distribution" which can be"

It can be confusing even to plan administrators. An offset distribution can be made to satisfy the loan if the individual is eligible to receive a distribution from the plan, such as having separated from service or reaching age 59½. It's effectively a distribution paid in cash that is immediately turned back around to pay off the loan held by the individual's account in the plan. It's a qualified plan-loan offset distribution if the loan is in good standing and has has never been in default.

On the other hand, a deemed distribution occurs when the individual fails to adhere to the terms of the loan, such as defaulting on a loan payment. A deemed distribution simply makes the outstanding loan balance taxable but does not satisfy the loan. The loan still has to be repaid, with the repayments of principal becoming after-tax basis in the plan.

For some reason, some plans seem to declare a deemed distribution and hold onto the loan even under circumstances that would permit a qualified plan-loan offset distribution instead. Doesn't make sense to me.

Nonqualified offset distributions can be rolled over within 60 days. For qualified plan-loan offset distributions, the rollover deadline is extended to the due date of the corresponding tax return, including extensions. Deemed distributions are not eligible for rollover at all.