Loan from 401k paid off early

[Smitty]

. Client under age 59 1/2. Left his job, paid off loan from 401(k) plan early. 1099 statement shows taxable, but no income tax withheld. Is this taxable income?

[Just-Lisa-Now- · Accepted solution]

If they have a 1099R with a taxable distribution sounds like it didnt get paid off. 

No withholding is a given, since it was distributed as a loan.

[TaxGuyBill]

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@Smitty wrote:

Left his job, paid off loan from 401(k) plan early.

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WHEN was is paid off?  It needs to be paid off within a certain time period in order to not be counted as a taxable distribution.

[Smitty]

Not sure when paid off...will find out, but amount is shown as taxable, sounds like didn't pay off with time frame. Thank you

[TaxGuyBill]

If the payoff was too late and this is taxable, then the payoff amount is added to the Basis of his 401k (which means that future withdrawals will only be partially taxable).

[qbteachmt]

Left the job in 2020, means the loan can be paid off up to the tax return due date and be considered timely. But that's a fairly new rule; perhaps this employer is treating it as Deemed Distributions subject to the old 60-day rule?

[Smitty]

Thank you

[qbteachmt]

Here is a nicely worded article:

"The new tax law changed the deadline for repayment after you leave your job starting in 2018. In the past, you generally had only 60 days to repay the loan or else you’d have to pay income taxes on the money as if it was a withdrawal (and a 10% early-withdrawal penalty if you left your job before age 55).

But under the Tax Cuts and Jobs Act, you don’t have to pay taxes or the penalty if you repay the loan by the due date of your tax return for the year when you leave your job (including extensions). For example, if you leave your job in 2019, you’d have until April 15, 2020, to repay the loan (or October 15, 2020, if you file an extension)."

https://www.kiplinger.com/article/taxes/t001-c001-s003-ex-workers-get-more-time-to-repay-401-k-loans...