Skip to main content
Message Font: Serif | Sans-Serif
 
No. of Recommendations: 0
I understand that if you don't repay the loan the unpaid balance becomes a taxable distribution plus penalties. But if all contributions to the 401(k) were after tax contributions, do you have to pay tax on that portion or just on the earnings? Does anyone know which of the IRS Publications addresses this issue?

Tricky, mostly for the plan administrator, more so than you. Assume you took a $50k loan from your account & at that time of the loan there was $200k in the account of which $40k was ltd after-tax contributions and $160k was ltd earnings. In the intervening time, you pay down loan to $40k and then default the loan thus creating a distribution.

You will be deemed to have a distribution of $40k of which you have a $8k ($40k * 40/200) basis in the distribution. A return of basis is not includible in gross income & is not taxed. Conversely, the $32k is includible in gross income and is therefore taxed at regular income tax rates; plus the §72(t)(A)(4) 10% penalty.

You can find lots of detailed examples of similar transactions to this in Publication 575. The real key here is to get the plan administrator to properly prepare the 1099R it sends you at the end of the year. Box 1 should say $40k & box 2A should say $32k.

TheBadger


Print the post  

Announcements

Disclaimer:
In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.