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Old 07-23-2009, 04:20 AM
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Join Date: Jul 2009
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Thumbs down Previously Defaulted on 401(K) Loan; Status Now Disabled

Hello there,
I will be *extremely* appreciative if someone takes a moment to point me in the right direction regarding a tax matter that I need to resolve ASAP (as it is for 2007).

I will try to keep this as brief as possible because it could potentially become a super-long post if I include *everything*! That being said, if I failed to provide relevant information, please let me know and I will update my post accordingly.

Because of an oversight, I under-reported both my earnings as well as tax withholding in 2007. There was one transaction that caused this error, which was a loan I took against my qualified plan.

I took the loan against my 401(K) during a time when I was working full time. Because of my (relatively youngish) age, I was not prepared for the news that I had contracted a debilitating illness (recovery is indefinite, as there is no 'cure' so I believe I meet the IRS definition of disabled). The loan payments were being deducted from my pay and when I began receiving benefits for long term disability, I unknowingly stopped making payments and found out too late that I had defaulted on the loan. (My poor health was to blame, as well as not having someone lined up to properly handle my affairs.)

So, I understand that the loan would be taxed as a distribution. Because I was in my 30s I knew I might be penalized in addition to taxed at my normal rate. However, my status qualifies me for a distribution code "3" (disabled) as per the IRS definition. I have read a lot of tax code and talked to the IRS at least half a dozen times or more. I thought I had it all wrapped up when the IRS gave me what they needed me to include in my correspondence. However, when I called my brokerage firm/plan admin for the 401K, they refused (and are continuing to refuse) to update the distribution code to the correct code. I could rant about this matter for a very lengthy time because I know that it can be done; however, I have escalated (etc.etc) to no avail and feel like my time needs to be directed towards resolving this another way. I thought I read somewhere that you could file a tax form in order to dispute the reason for distribution? Is this correct?

Or would this even be the correct way to handle this matter? Basically the IRS indicates that I owe a nominal amount; however, since I withheld 10%, I believe I shouldn't owe. Regardless, I want my taxes to be done *correctly* so was hoping someone might be able to assist.

While not a tax professional (at all!), I do have a good working knowledge regarding investments and taxation, etc. as I previously worked as a broker. And yes, I knew better than to take a loan against my assets but I made an error in judgment (based on the fact that I would be working for another 40 years without a "break" if you could call this a break---NO!). I miss working so much, it's not even funny but I digress.

Can someone help me regarding this matter? My options are to pay the $200 or whatever it is (and i think I am not waiving my rights to contest at a later date?), send correspondence backing up what I have just explained (although they requested a corrected 1099R, which I haven't been able to get yet...but still trying!). The distribution was for $11K and I withheld the standard 10%.

Thanks a gazillion for reading!
Kind regards,
-Jolie



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