Expert: Allen - 12/18/2007

Question
QUESTION: I have borrowed a loan ~40k from my 401k savings in Feb 2007
and it was defaulted in july 2007 .. When I realized it was defaulted, Financial institution representative mentioned that I can rollover to IRA with-in the end of 2007, so that I don't need to pay tax(plus penalty).

This option is available to me since

1. I am still an existing 401 k holder
2. I quit the job in Mar 2007.

pls advise on this

Thanks


ANSWER: You may be able to avoid the penalty if the loan did not go into defult until July. However, you will have to pay back the loan plus interest before you rollover. A paticipant loan can not be part of an IRA. You can not avoid the penalty if the default first occured in June or earlier.

---------- FOLLOW-UP ----------

QUESTION: You may be able to avoid the penalty if the loan did not go into defult until July. - I can see that I have defaulted in July. if so , can I rollover to IRA..how do I convice my 401k company for this? Is there any clause i can read through and explain them? pls advise

However, you will have to pay back the loan plus interest before you rollover. - I am willing to pay that..

A paticipant loan can not be part of an IRA. You can not avoid the penalty if the default first occured in June or earlier. -when you say default first,do you mean by "the first instalment that was not paid on due date".. or the company first defaulted against my loan.

Thanks
Gopal

Answer
In reviewing what you are saying, it appears that the loan came due when you terminated employment. This is an optional provision that is probably in the plan document of the company.
I believe the only option is to go to your company and ask them if you can pay off the loan before you receive a distribution from the plan.
Unfortunately, the rules are very complex and can be found in the IRS regulation dealing with loans from plans - Regulation 1.72(p)-1.