Martine Benne

Here is a similar question (sorry to zombie this thread): Instead of the 59-1/2 (59 6 months exactly) happening after the cure, what if it is during the cure followed by a subsequent default? For an example, 01 Feb take out a 401K loan. 14 Feb is terminated/quits, Happy Valentines Day. 60 day cure period ends on 15 April, comes and goes, and she allows the loan to default. Pretty cut and dried. Here's the twist: she turns 59 1/2 on 07 April, a week before the end of the cure period. I just want to clarify when the actual default occurs for purposes of distribution. The way I read it, the default and thus the distribution deemed are at the end of the 60 days cure period, 16 April. She would seem to have avoided the early withdrawal penalty (if any, see below), and it is simply a normal distribution event since the event was after her "half birthday". Normal taxes and a 1099-R (But no need for a 5329). Or is this to deemed to occur on the termination date 14 Feb due to no effort during the cure, and instead the Rule of 55 applies. Or is there a penalty applicable at all that I somehow don't know about due to the loan? Edge cases like this make me nervous, and the loan throws all kinds of smoke. (by Rule of 55 I mean IRS Pub 575 "Additional exceptions for qualified retirement plans.") The reason I'm asking is I may see a relative in a similar scenario if what happens is what I think will happen. Trying to talk her out of taking out a loan she doesn't (yet) need, and use "Rule of 55" and just take what she needs as a distribution when she needs it, and ride it out that way if necessary (instead of a big chunk of a loan).