This content was created by MARK KOHLER. This content was uploaded by MARK KOHLER. This is a YouTube video titled "Converting a 401k loan to a Distribution" (created 2021-01-20). It is a conversational Q&A between MARK KOHLER and Matt about handling a solo 401(k) loan under the CARES Act. They discuss options including taking an in-kind distribution versus a cash distribution, converting/closing the loan by taking a distribution and repaying it within the three-year CARES Act window, tax and withholding implications (no mandatory 20% withholding, exemption from the 10% early withdrawal penalty, and the option to spread tax recognition over three years), and give a numeric example using a $50,000 loan (one-third taxed each year, roughly $4,100 immediate tax at a 25% effective rate). Practical steps and caution about documentation are also mentioned.
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They have a loan out of their solo. What are their options? That's really what the question is.
Right. So I think the question is, can I take a distribution of it? Like the loan rap, you know? Because I can. If you don't pay off your solo 401k loan, you got five years. Supposed to make at least quarterly payments. When you take the solo K loans. If you don't pay it off or you miss it over two payments, over two quarters in a row, it's considered distributed. Now there's some relief right now under the CARES act if you miss them. But let's say you want it distributed. Like, is it a Jim, who's asking here if you want it distributed? I guess you could take, and I believe this would work. You take an in kind distribution of the loan and you could take it under the CARES act. So you would have three years to pay it back in. You're gonna have to pay a third of it now on your 2020 taxes. A third in 2021 and a third in 2022. But that's possible. I've had someone look at it and I've tried to find. I spent at least 15 minutes trying to find some guidance on it because it's not a cash distribution.
Matt, I got an idea. Let me throw out an idea.
Okay.
If they've got a loan for 50 grand under traditional rules here, that means they should have another 50 grand sitting in there at least. Right. Because you can only take 50 grand or 50%.
Right.
So we know they've got 50 grand sitting in the 401k. Rather than do an in kind distribution and go through all those headaches, just do a distribution for 50 grand, then turn around and put it back in as a payoff on the loan. Now you've got a distribution that you're sitting on.
Yeah. That would have the same effect. I was just gonna say. Yeah, yeah, same effect.
Yeah.
And now you're in this three year distribution rule. Closed up. Excuse me, Closed out the loan instead. And now you got three years to get the distribution back. So I've. I've. Like I said, I haven't seen guidance on the in kind distribution. I think it works. I went back and read the CARES act for a client that asked us a while back. I don't see any distinction between in kind or cash distribution. Because distributing the loan is what's called in kind.
Yeah.
I'm just saying be safe and do Mark's method.
Yeah. I'm just saying it's the same effect. I'm just saying it might be easier than chasing down this in kind crap is just take a distribution for 50, put it in the bank for one day, and then turn around and go back to the 401k with the documentation in your solo 401k binder, and then you would pay off the loan. Now, what's interesting, there's a point that there's the tail. Let's talk about the tail. You got to pay a third of the tax on $50,000 now. Or rather be April 15th. Or are you required to withhold that from your distribution? Matt, can you wait until April 15th?
You're excused from the withholding and the 10% early withdrawal penalty. So that's nice. You don't have to do any withholding. Okay. Usually when you take a 401k, you got to withhold 20%. So let's just keep that under the CARES Act.
Yeah. Now, what's interesting here is let's say that what the years. Let's say you're an effective rate of 25% fed and state. So on $50,000, what's the tax going to be? 0.25 would be 12,500.
Oh.
But you only have to pay a third of that right now. So right now that's basically about 4,000, $4,100. So you have $4,100 in tax due. You don't have to make any more loan payments because you don't have a loan anymore.
And if you've been really financially affected, you might be in a low tax rate. You might have a lot of losses this year. They're an offset anyways. And if that is the case, take the whole 50,000, because it's optional. If you want to take the whole 50,000 into your income this year, you can. If you want to spread it out over three years, you can also. But if, like, if you're an example, I think they said this, they've really been financially affected. They had an Airbnb business that's gone down the toilet. If they've got a lot of losses, I just take it all in this year.
Yeah. So it's $4,100 in tax max if you went that route. But here's what's cool. If you do in the next three years, world comes back to normal and you pay back the $50,000, then you get a refund of any tax you did pay. Got three years to put the money back. If you don't put it back, it's over tax paid, done.
