Welcome Guest. Register Now!  

LinkBack Thread Tools Search this Thread Display Modes
  #1 (permalink)  
Old 07-23-2009, 04:20 AM
Junior Member
Join Date: Jul 2009
Posts: 1
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,

Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote

Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

vB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off

Similar Threads
Thread Thread Starter Forum Replies Last Post
IRS Tax Benefits for Disabled Taxpayers TaxGuru For 2008 1 12-30-2010 07:12 AM
Treasury Off-Set Program and Defaulted Student Loans??? mdevitt Income 0 04-13-2009 03:30 PM
IRS rules that "Certain Payments to Disabled Veterans Ruled Tax-Free" TaxGuru Income 0 12-29-2007 02:29 PM
Claiming the Credit for the Elderly or the Disabled Samatg General 0 03-15-2007 07:52 PM
Depreciation method for previously used assets used in business TaxGuru Depreciation 0 02-13-2007 10:04 PM

Follow us on Facebook Follow us on Twitter Google Buzz Rss Feeds

» Categories
 » Income
 » IRA/Sep
 » Medical
 » Payroll
Forum for CPAs
Financial Planning

» Recent Tax Q&A
No Threads to Display.