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If you have a 401(k) plan that allows loans to be taken and have elected to take a loan, this is called a "deemed distribution".

A deemed distribution is treated as an actual distribution for purposes of determining the tax on the distribution, including any early distribution tax. A deemed distribution is not treated as an actual distribution for purposes of determining whether a plan satisfies the restrictions on in-service distributions applicable to certain plans. In addition, a deemed distribution is not eligible to be rolled over into an eligible retirement plan. (Reg. § 1.72(p)-1, Q&A-11 and -12)

However, if a loan goes into default it is generally treated as a taxable distribution from the plan of the entire outstanding balance of the loan (a “deemed distribution”). The plan’s terms will generally specify how the plan handles a default. A plan may provide that a loan does not become a “deemed distribution” until the end of the calendar quarter following the quarter in which the repayment was missed. For example, if the quarterly payments were due March 31, June 30, September 30, and December 31, and the participant made the March payment but missed the June payment, the loan would be in default as of the end of June, and the loan would be treated as a distribution at the end of September. (Reg. § 1.72(p)-1, Q&A-10(a))

For more information, please refer to the IRS Retirement Plans FAQs regarding Loans webpage.

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.


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