An tax experts on here?

[pofarm]

I had a $30,000.00 401(k) loan that I defaulted on due to losing the job I had, so the loan became taxable income. I rolled the remainder of the 401(k) into an IRA so it isn't taxable. An investment adviser at the company who handled the 401(k) account told me that I might not be liable for the early withdrawal penalty on the loan default since I was 55 years old at the time of the default. Can anyone tell me if I will have to pay the penalty? The online tax preparation site my wife uses didn't assess a penalty, but I want to be certain before I file. Thanks!

[syscrusher]

I think you don't have to pay but here's the rule:

 

Did you know you can access your 401(k) penalty-free at age 55? - Forbes

 

Did you realize that there is a provision within the Internal Revenue Code that allows you to start taking distributions from your 401(k) plan before you reach age 59½? This little-known section of the code, §72(t)(2)(A)(v) to be exact, can be a real dandy if you happen to fit the requirements.

 

 

Note: although we will refer to the 401(k) throughout this article, this code provision applies to all ERISA-qualified, employer-established defined contribution plans, which includes 401(k), 403(b), 501(a), and others, including the federal TSP.

 

Here’s how it works: if you are employed by a company and are participating in the company’s 401(k) plan and you leave employment with that company at any time during or after the year in which you reach age 55, there will be no penalty for taking distributions from the plan. Normally, any distribution (other than specifically-qualified distributions) prior to age 59½ would result in a 10% early-distribution penalty being applied.

 

 

It is important to note that these distributions only qualify when received from a company-established defined contribution plan – NOT an IRA account. Just to be clear: THIS PROVISION DOES NOT APPLY TO IRA ACCOUNTS. In order to maintain this penalty-free distribution, the funds must not be rolled over into an IRA. This is a critical distinction that you need to understand – a mistake would take away this option completely. Make certain that you completely understand how this works before starting a distribution, as it could be costly to make a mistake.

 

 

Lastly, the Pension Protection Act of 2006 made an additional change to this rule: The age limit is reduced to 50 for retiring police, firefighters, and medics – so they can take distributions from their plans penalty-free at that age or after. For folks using the federal TSP as their retirement plan who are law enforcement officers, firefighters, or air traffic controllers, you can begin taking penalty-free withdrawals from TSP at any age if you have at least 25 years of service in those positions. Otherwise, the age 50 rule applies if the individual has had at least 20 years of service in one of those positions.

 

 

With this rule in mind, many folks are able to start retirement earlier than age 59½ and take distributions without penalty and without having to set up a complicated Series of Substantially Equal Periodic Payments plan. For more information on this and other provisions, you can check out my book An IRA Owner’s Manual.

[Eck]

(Quote) I might not be liable for the early withdrawal penalty on the loan default since I was 55 years old at the time of the default.

 

 

I think the penalty applies at the time you took out the loan, not when it went into default......What age were you when you took out the loan?

 

 

As posted above (quote); or after the year in which you reach age 55, there will be no penalty for taking distributions from the plan.

[pofarm]

I was 54 at the time I took out the loan. Since it was a loan it wasn't considered income until the default, though.

[utadventure]

The magic age is 59 1/2, there are exemptions. The exemptions can be found in the instructions for IRS form 5329, page 3. If the reason for the loan fits the exemption or the reason for default fits, take the exemption.