Taxation of 401(k) loan after death

by **Weemery** » Sat Mar 03, 2012 2:42 pm

45 year old client dies with outstanding $20,000 401(k) loan. 45 year old wife (beneficiary) rolls 401(k) to her IRA without paying off the loan. The loan will be taxed as ordinary income, but will she also be charged the 10% penalty?

Matt Ringler, CFP

by **Bradly T.** » Sat Mar 03, 2012 4:44 pm

Don't know yet....but will soon. Related question is whose SS # on 1099? Probably decendent and probably no penalty but never had issue....yet. You'd think participant death is an early withdrawl exception.

by **Bradly T.** » Mon Mar 05, 2012 10:18 am

Turns out death IS an exception to early withdrawl rule. Neither decedent nor beneficiary is subject to penalty for unpaid loan - now a distribution. Beneficiary may need to verify participant's death to IRS on final return and amount IS taxable to decedent estate/spousal beneficiary. 1099 should be in decedent/participant's SS #.