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Fielding Mellish

Loan from a Rollover?

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Participant has an account in a money purchase pension plan and an account with a 401(k) plan.  Participant meets the requirements for a lump sum distribution from the MPPP.  He takes the lump sum, and then timely rolls it over into his 401(k).  The 401(k) permits loans to participants.

Can the participant use the amount rolled over into the 401(k) for a loan?  Assume he meets all the other requirements for a loan under the plan document but the plan document doesn't speak to whether a participant can use money rolled into the 401(k) plan for a loan.

Thanks.

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I'd be very surprised if the plan document doesn't somehow address this, although it might be "sideways" and require some cross-checking, particularly if the document isn't in an Adoption Agreement format.

It is clearly permissible for a 401(k) plan to allow rollover money to be used for loan purposes. If the document TRULY does not address this in some form, one way or the other, then it is the responsibility of the Plan Administrator to make the determination of what is and is not allowable under the written terms of the plan.

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There is no prohibition in the code or regs from taking a loan from a rollover source of funds.

The plan document and/or loan program may place restrictions on the source(s) of funds that may or may not be eligible for loans.

 

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For reinforcement of Belgarath's answer, notice how the following paragraphs from the IRS's rollover notices imply the ability to borrow from a rollover account in an employer plan, whether the rollover is non-Roth or Roth.

First, from the non-Roth version of the notice (emphasis supplied):

Where may I roll over the payment?

You may roll over the payment to either an IRA (an individual retirement account or individual retirement annuity) or an employer plan (a tax-qualified plan, section 403(b) plan, or governmental section 457(b) plan) that will accept the rollover. The rules of the IRA or employer plan that holds the rollover will determine your investment options, fees, and rights to payment from the IRA or employer plan (for example, no spousal consent rules apply to IRAs and IRAs may not provide loans). Further, the amount rolled over will become subject to the tax rules that apply to the IRA or employer plan.

Next, from the Roth version of the Notice  (emphasis supplied):

Where may I roll over the payment?

You may roll over the payment to either a Roth IRA (a Roth individual retirement account or Roth individual retirement annuity) or a designated Roth account in an employer plan (a tax-qualified plan or section 403(b) plan) that will accept the rollover. The rules of the Roth IRA or employer plan that holds the rollover will determine your investment options, fees, and rights to payment from the Roth IRA or employer plan (for example, no spousal consent rules apply to Roth IRAs and Roth IRAs may not provide loans).

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