Can I take normal distributions while still repaying solo 401(k) loan

permitted. All repayments are being made normally on a timely basis.

time? Of course the proper 1099-R's will be issued for these and I am over the age below which there would be early-distribution penalties.

salary every year (so I am still an employee) although there is little income in the corporation at the moment.

a few places on the web where it seems to be implied that one cannot take distributions while a plan loan is outstanding. I assume that they are wrong or that they refer to other circumstances. Am I correct?

It is my understanding that if you take a distribution while the loan is outstanding you have violated Sec. 72(p)(c) of the Code. This is the section that requires substantially level amortization of the loan with at least 4 payments per year. If you take a distribution, it is effectively a return of your own payment(s). You no longer have substantially level amortization and have a deemed distribution.

Very interesting! Well, it is possible for me to avoid all distributions until after the loan is repaid if that is necessary.

If you know of any published authority for this interpretation I would appreciate it if you could post it.

I am surprised by it because the distribution could come out of other plan assets that were there before the loan was made and continue to be there, unrelated to the loan or payments made on the loan.

But if that is the IRS's position then I will have to avoid any distributions until the loan is repaid.

Thanks very much for alerting me.

plan assets that were there before the loan was made and continue to be there, unrelated to the loan or payments made on the loan. [...]

The above comment makes no sense to me. How do you figure that some assets are related to the loan and some are not? The amount of the loan you take is based on total assets, not some designated subset.

If it were possible to do what you want to do, what would stop someone from taking a completely tax free distribution up front, calling it a loan, and then paying it back with smaller annual taxable distributions? This would effectively be deferring the tax on the (non-rollover) distribution, which is not a feature of 401k accounts.

I can turn that around and say why should you assume that it is related to the loan, and so what id it is anyway? After all, loans are limited to 50% of assets.

I am just interested here in what the law and regulation are, not what they should be from a policy point of view.

If the law permits loans, and permits distributions, and does not prohibit distributions while loans are outstanding, that is one case. If it amounts to an advantage for some, fine. The code is full of such cases.

If it prohibits distributions while loans are outstanding, that is another case. I have not found any explicit IRS statement on the subject but I am sure there must be one somewhere. Normally the IRS addresses such issues explicitly rather than by policy-based supposition.

For example, people over 71 are already taking regular distributions. Are they prohibited from taking loans in all cases? Does it say that somewhere?

That has no bearing on what others here might be interested in. 401k loans are not a good idea and never have been, it's too bad they were ever allowed. Just one example of needless complexity in the tax code, created no doubt to coddle some lawmaker's brother-in-law or something similar.

I believe that is far from accurate. There are many issues of interpretation which the IRS does not explicitly address, waiting instead for an appropriate court case to arise. Maybe that could be you!

loan, and so what id it is anyway? After all, loans are limited to 50% of assets.

should be from a policy point of view.

distributions while loans are outstanding, that is one case. If it amounts to an advantage for some, fine. The code is full of such cases.

case. I have not found any explicit IRS statement on the subject but I am sure there must be one somewhere. Normally the IRS addresses such issues explicitly rather than by policy-based supposition.

they prohibited from taking loans in all cases? Does it say that somewhere?

The law and regs say that if you take a distribution you have violated the level amortization clause.

Your loan requires payments of $100 per month. You make those payments month after month until one month where you are short of cash. So you take a distribution of $100 and make a payment of $100. Things are really bad and month after month you can not pay back the loan, so you take a distribution every month and then pay it back. It is this set of transactions that the law was written to stop. You can't use your own retirement account to pay back a loan to that retirement account.

Where do they say that?

See my original reply and the final regulations.

What is your "understanding" based on? I don't see it leaping out at me from Sec. 72(p)(c) of the Code, or the couple of explanatory documents from the IRS that I read.

Thanks - that would certainly be the right place for it to be.

However I cannot find any such provision in either the law

However I will keep looking and will follow up if I can find such a provision......

You won't find a specific code section, regulation, ruling etc. I and others of my "ilk" have interpreted Section 72 and 402 requirements on loans to mean that 1. You must make level payments that pay off the loan in less than five years. 2. You make increase the loan amount within limits as long as you still meet the level payment rule and time period rule. 3. You may make hardship withdrawals as long as you continue to make those level payments. 4. You still must take an RMD and make those level payments. 5. If you take a plain vanilla distribution, the distribution will be considered an offset to your level payment and you will violate the level payment rule and have a deemed distribution.

Please feel free to interpret the code and regs differently. However, before you do, try asking your employer what happens to an outstanding plan loan if you take a distribution from the plan that is not a hardship withdrawal or RMD while there is still an outstanding balance.

On 2013-04-17 08:56, Alan wrote: [...]

That's part of the issue I see here -- it's a solo 401k and as stated in the original post, the corporation sponsoring the plan is basically inactive except to keep this scheme alive for its (presumably) sole shareholder.

plan loan is outstanding. I assume that they are wrong or that they > refer to other circumstances. Am I correct?

That is becoming increasingly common in this free, moderated newsgroup. Experts such as Alan provide valuable free advice (in no way do I consider myself in Alan's league as far as advanced expertise), and when posters don't like the answer, even when they suspect from the very beginning that the answer won't go the way they would like, they keep on asking over and over as if somehow they are going to get auditable support for their shaky position by simply repeating the question.

This is not a personal attack on Mr. Brady; as I said, the trend seems increasingly common.

I see nothing wrong with a poster asking for SUPPORT for statements made, or an admission that it is an opinion only at this point.

I am not sure I agree with Alan's opinion (although it being a solo 401k doesn't help the poster in this instance), but would certainly suggest the OP use other financing mechanisms that might be at his disposal in order to avoid finding out if Alan is right or wrong, at great expense and trepidation.

I left one thing out in my 5 points. Any distribution will not be considered a loan offset if it is an eligible rollover distribution and the distribution is rolled over within 60 days.

If you want more info on this feel free to research the effect of a loan offset distribution.

Could it be rolled over into an IRA and then a distribution taken from that IRA?

Seth

The tax law that deals with loan offsets relates to taking a distribution from the same qualified plan that holds the loan and using the funds to payoff the loan. As I highlighted, certan distributions would not be considered a loan offset. I see nothing that would prevent someone from taking a distribution from a qualified plan (assuming the plan allows for distributions that are not loans, hardship, RMDs or a total distribution) that is an eligible rollover distribution, rolling it over into an IRA and then taking a dsitribution from the IRA to avoid the loan offset rules.

That said, there is always the possibility that if one was paying back a qualified plan loan with equal quarterly payments and one started to perform quarterly rollovers to pay back the loan, the IRS may want to argue "substance over form" and call it a loan offset.

what is this tax law?

Sec. 402, its regs and rulings and court cases.

Thanks very much for the further follow-ups!

According to

Definition of plan loan offset amount. For purposes of section 402(c), a distribution of a plan loan offset amount is a distribution that occurs when, under the plan terms governing a plan loan, the participant's accrued benefit is reduced (offset) in order to repay the loan (including the enforcement of the plan's security interest in a participant's accrued benefit). A distribution of a plan loan offset amount can occur in a variety of circumstances, e.g., where the terms governing a plan loan require that, in the event of the employee's termination of employment or request for a distribution, the loan be repaid immediately or treated as in default. A distribution of a plan loan offset amount also occurs when, under the terms governing the plan loan, the loan is cancelled, accelerated, or treated as if it were in default (e.g., where the plan treats a loan as in default upon an employee's termination of employment or within a specified period thereafter). A distribution of a plan loan offset amount is an a ctual distribution, not a deemed distribution under section 72(p).

However in my case I would take a distribution first and pay tax on it. So I would not be reducing (offsetting) the loan from within the plan, but rather from tax-paid funds outside it at that point.

But I will just roll over to an IRA first in any case so problem solved since everyone agrees that is fine......