Just quit/retired and have a primary residence 401(k) loan. Original plan was to default and take that amount as first distribution in 2025/2026 but didn’t make it to 2026. Given I pulled the plug so early in 2022, the tax hit next year should still be in the lower brackets so considered letting it just be the distribution, however, given the change with the TCJA and payback period on the default is now through next April and I comfortably have the means to repay, I am giving some consideration to rolling the amount over but to a Roth - like backdoor.
Rather than pay-up and roll over as IRA… blah blah… can I let the loan go into default, take the qualified loan payout and then sometime before next April re-evaluate and simply make the payment into my Roth for the after tax amount if it seems appropriate?
Rather than pay-up and roll over as IRA… blah blah… can I let the loan go into default, take the qualified loan payout and then sometime before next April re-evaluate and simply make the payment into my Roth for the after tax amount if it seems appropriate?
Not exactly. You actually have until your tax return for 2022 is due or filed (potentially until Oct 15, 2023 if you file an extension) before your loan will be considered to have defaulted and be a distribution. You will need to repay that loan into a Traditional IRA or other Traditional qualified plan (like your 401(k), if they will accept the payment) to avoid that default. If the loan defaults, you would then have up to 60 days after the default to do a rollover of the defaulted amount into a Traditional account to cure the default. This rollover would only be valid if you have not done another non ‘trustee-to-trustee’ rollover in the prior 365 days, and it would prevent you from doing another non ‘trustee-to-trustee’ rollover for another 365 days.
Once the loan is paid back into a Traditional account, you may choose to do a conversion of that amount, or any other amount you choose, to a Roth.
You don’t give your age, so I will point out that unless you will be at least 55 by the end of 2022, so that distributions from your 401(k) are qualified, any non-cured default on the loan will also result in a 10% penalty, in addition to taxes.
Given I pulled the plug so early in 2022, the tax hit next year should still be in the lower brackets so considered letting it just be the distribution, however, given the change with the TCJA and payback period on the default is now through next April and I comfortably have the means to repay, I am giving some consideration to rolling the amount over but to a Roth - like backdoor.