401K Short Term Loan alternatives

[BWSPLLC]

My spouse has funds with Supervalu 401K, which is a plan she participated in during her employment with a large drug store chain during the 80's and 90's. She quit in 1998 leaving the funds in the account and receives quarterly statements showing a decent return.

She is interested in taking a short-term loan from the account while we await funds from a property we are preparing to sell, and the loan will repaid this calendar year with some of the proceeds from the real estate sale. However, we learned the plan does not allow loans against the account if one is not currently employed by a program participant.

Since she did not rollover the funds to another account upon her separation in 1998, what options might she have to withdraw some or all of the funds without being taxed by the IRS, or otherwise penalized for a partial or total withdrawal from the plan holding her funds?

Consequences aside, it certainly seems possible to withdraw all of the funds from the account, but she's not interested in doing so at the cost of substantial penalties and tax consequences.

Practically speaking, I would think one can withdraw funds held with a given plan at any time provided the funds are returned to a qualifying plan within the same calendar year, but I'm probably wrong...

Anyways, thank you in advance for any meaningful feedback and anticipated correction of my assumptions.

[cooliemae]

If you're going to pay back the loan this year, you might look at a peer-2-peer lending site to meet your short term loan needs. Of course, this option may or may not be viable depending on what the loan's interest would be. However, if you're going to pay it off before the end of the year, then the apr will actually be lower.

[disneysteve]

There is no way to get the money without taxes and penalties assuming you are younger than retirement age.

Borrowing from retirement is a very bad idea anyway even if she could take a 401k loan.

Do you own any other property besides the one you are selling? If so, how about a home equity loan or line of credit? Do you have any low-interest credit cards you can take an advance on since it is only for a few months?

How much money are you talking about needing?

[BWSPLLC]

There is no way to get the money without taxes and penalties assuming you are younger than retirement age.

Thank you for the response.

That's unfortunate. I'm assuming from your response that once the account was not rolled over that there is no longer a method whereby the funds can be transferred from the current administrator to a different type of fund/account whereby a short term loan might actually become an option?

We have no other avenues, so I'm seeking any alternative which may allow the funds to be moved from the current program to another type of retirement account which would allow access to a loan without exposure to the penalties and taxation of straight withdrawal.

[Petunia 100]

Actually, if you take a withdrawal, you have 60 days to put the money into a qualified plan/account and have it be considered a rollover.

There is a catch: the custodian will withhold 20% for federal taxes. You must deposit 100% into the new plan to avoid taxes/penalties, even though you will receive only 80%.

Personally, I would look into other possibilities. Just because you can, that doesn't mean you should.

[BWSPLLC]

Actually, if you take a withdrawal, you have 60 days to put the money into a qualified plan/account and have it be considered a rollover.

There is a catch: the custodian will withhold 20% for federal taxes. You must deposit 100% into the new plan to avoid taxes/penalties, even though you will receive only 80%.

Personally, I would look into other possibilities. Just because you can, that doesn't mean you should.

Thank you for the reply.

Thanks again for the recommendation NOT to make the withdrawal. I get it, and sincerely appreciate the wisdom. I've give you some background...but it really doesn't matter. What matters is, we need short-term liquidity and have ample secured assets, just lacking some interim liquidity.

Her current employer has a plan she may be able to roll the funds in to and we hope to have word on that soon. Not sure if that will allow a loan of the roll-over proceeds, but it should provide access to the 60 day loan and provide an opportunity to mange the account.

I understand the administrator is required to secure 20 % and see that 100% of the gross would need to repaid to a qualifying account. Question is, what happens to the 20%? I trust is is recoverable at some point...any idea how that process works?

[cooliemae]

If you can directly rollover the money from the current plan (old employers) to a new plan then the 20% withholding doesn't apply. It's only when the money is paid to you directly that the 20% withholding applies. As for getting the money back, I believe that you would receive the money back as a tax refund, as the company sending you the money should have withheld the 20% and submitted that money to the IRS.

So here's how I think it works...anyone knows better please post the correct answer.

$10,000 balance in Company A account
You want to roll that over to Company B's plan.

Option 1: Direct Transfer
Have Company A and Company B talk to each other so that the entire $10,000 is transferred from Company A to Company B. You never touch the money so no required withholding occurs.

Option 2: Indirect Transfer - Full Amount
Company A sends you a check for $8,000 and a check for $2,000 to the IRS. This is the 20% required withholding. Within the 60 day limit, you take the check for $8,000 add an additional $2,000 from your current cash reserves and provide Company B's 401k with $10,000. There will be no income reported on this transaction and the $2,000 withheld by the company will be refunded to you through the IRS when you file your taxes.

Option 3: Indirect Transfer - Partial Amount
Company A sends you a check for $8,000 and a check for $2,000 to the IRS, again the 20% withholding is required. You take the $8,000 and turn it over to Company B's plan within the 60 days. The $2,000, from the original $10k, that was not placed into Company B's plan will be treated as taxable income. There will also be an additional 10% penalty on any earning included in that $2,000 if it was distributed before you turned 59.5 years old. For arguments sake, let's say that $500 of the $2k was earnings. At the end of the year, you would have to include the entire $2k as ordinary income and you would be assessed a $50 penalty (10% of $500). And again the $2k withheld by Company A would be part of your tax refund.

Can you provide us with a few more details as to how much you need to borrow and how long you are looking to have the balance outstanding?

[Petunia 100]

I understand the administrator is required to secure 20 % and see that 100% of the gross would need to repaid to a qualifying account. Question is, what happens to the 20%? I trust is is recoverable at some point...any idea how that process works?

You will receive a 1099-R next year. It will report the distribution and the withholding. The withholding will count towards your tax liability, the same as withholding from your paycheck. If you have overpaid, you will receive a refund.

Be forewarned: the distribution code will be wrong (it will indicate an early distribution, not a roll over). Save all of your paperwork. When you file your return, you will not be reporting the distribution as income. This may raise a question from the IRS and/or your state. If you receive a letter, do not panic. You will reply that you did deposit 100% of the distribution into an IRA within 60 days, and you will provide a copy.

[BWSPLLC]

Thanks for the detailed replies. I'm waiting to hear back from the administrator of her current employer's plan to see what they can offer. Ultimately, it would be best if we can rollover the old 401 to the new administrator and take a short-term loan from the account without penalties.

If we won't be able to take a loan against the funds that were rolled over we'll likely withdraw a minority portion of the account and roll the rest over to the current employer. But I will wait until I have more info so I can see all of the options and time any withdrawal in a manner that will allow ample time to repay before the 60 day window.

Thanks again, and please don't hesitate to add more if you have another angle or recommendation.