Loans

[Guest elang]

I was hoping somebody could help detail out all of the negative tax implications of the following situation:

In June of 2009 Participant has a current Loan Balance of approx $18,000 and participant takes a loan withdrawal of $62,000 and refinances his loan to $80,000 for 5 yrs. In December of the same year, participant takes out another approx $23,700 and refis up to $100K.

Couple items to note: For the original loan, and at the time of the first refi, the highest loan balance in the previous 12 months = approx $22k. Also, the participant is of retirement age.

I appreciate yor help!

[Jim Chad]

FWIW I would guess that $82,000 is taxable in 2009.

But I have no reg to quote. It is just my guess. This might be a great time to call the VCP people and talk about this case anonymously.

[masteff]

It falls under 72(p).

I'd say approx $72K is taxable distribution.

$50K - $22K = $28K

$100K - $28K = $72K

Of course have to look at whether the refinancing meets the restrictions in the regs (and that the plan permits refi's).

Otherwise... what Jim said.

[Guest elang]

My concern after reading 72(p) and the examples of refi’s under Q&A 20, is that the deemed distribution and taxable amount may be $152K.

1. In June of 2009, he was allowed to borrow $28K ($50K-$22K), but instead borrowed a total of $80K, leaving him w/ a deemed distribution / taxable income of $52K.

2. In December of 2009, he was allowed to borrow $0.00, but instead borrowed $100K, adding an additional $100K.

Does that sound right? I hope I am misreading this.

[austin3515]

You are misreading it. The 152K numer your saying is solely to figure out whether or not someone gets a new 5 year term. The reg isn't saying that you really have 152K out in loans, they are just going to treat you like do for purposes of determining whether or not you qualify for a new 5 year term.

[Guest elang]

Thanks, I appreciate your help.