401K loan default??????????

L1: 401K loan default??????????Scenario: I”m 57 1/2 and going to retire 4 months from now. Have a company 410K plan. The 401K allows me to borrow up to $50K[which I would borrow 2 weeks before retirement]. If I do this the plan administrator said before I rolled out the 401K into an IRA [company won”t let us stay in the 401K plan]the borrowed money would be subtracted before rollover and would act as a default which he said be in a 10% penalty situation. Why would it be if I”m able to retire at 55. I”m trying to get some money to live on until 59 1/2 without setting up a SEPP(72t). The IRS really screwed me up by changing the calculation procedure starting 1/1/03. Do you think if I went to the IRS Taxpayer Advocate Service could a exception be made to eliminate the 10% penalty because I decided to work through the bear market rather than retire 2 years ago. If I would have then I would have gotten my RMD but it would have been greater than I can get now and I have more money in plan. The way it sounds Vanguard will send in the 1099-R form as a 1 put in #7 box. Any ideas I can take or do you think an exception is possible???????? BELOW PLEASE
GFW or Badger you gave me some advice before and was wondering if the answer I got from a different CPA was in line with IRS rules. Heres the other CPA”s answer: “If you were to request a lump sum distribution at retirement and roll some of it to an IRA and retain the rest of it, you would pay tax on what isn”t rolled over. The 10% penalty wouldn”t apply because you”ve separated from service after age 55. If you used that approach, $50,000 wouldn”t be the limit. You could take as much as you want to pay income tax on. There would be income taxes withheld on anything that you don”t roll over but that shouldn”t be a detriment if you”re actually owe tax that the withholding offsets. I don”t like plan loans, they tend to trip people up in unexpected ways. I think you can get where you want to be without the loan. ” Thanks again for such a helpful site. John2002-12-16 20:57, By: John, IP: [127.0.0.1]

L2: 401K loan default??????????The response that you received is correct and if you look in the left menu under the exceptions, you”ll find the exception for distributions after age 55.
If you take the 50,000 as a distribution and have the Plan Administrator do a Direct Transfer of the balance, then there should only be withholding on the 50,000. However, I believe (ask the Plan Administrator) if you take the total amount as a distribution, keep 50,000 and then you rollover the remainder that the Plan Administrator will withhold tax on the total distribution, not just the 50,000.2002-12-17 04:45, By: Gfw, IP: [127.0.0.1]

L2: 401K loan default??????????Hello John:
The “seperation at age 55” exception to the 10% surtax (IRC 72(t)(2)(A)(v)) requires that you attain the age of 55 or greater when the distribution takes place — you clearly qualify; AND, you must be seperated from your employer — you would not be as you would take a loan while still employed. Thus, defaulting a loan is not the way to go.
Instead, you should request the plan administer (and hope they will comply) to issue two checks after you are seperated: one, the big one, as a rollover to discount brokerage of your choice. No taxes should be withheld from this transaction & a 1099R should be issued with a reason code of “G”. A second check sent to you directly for whatever amount you theoretically need to make it to age 59 1/2. This check should have federal taxes withheld (or waived at your election) and should have a reason code of “2” in the 1099R.
TheBadger
wjstecker@wispertel.net

2002-12-17 08:10, By: TheBadger, IP: [127.0.0.1]