Roth Loan Taxation Deemed Distribution

[52626]

Plan allows loans from Roth Account.

Participant terminates employment before the loan is paid in full.

Participant is 591/2 and 5 years since first participated in Roth.

The Roth loan balance is $10,000.

Am I correct in saying the defaulted loan (now a deemed distribution) is not a "qualified distribution" therefore, the portion of the loan balance attributable to earnings is taxable income.

For example:

Loan Balance $10,000

Portion attributable to deferrals $8,000

Portion attributable to income $2,000 - taxable income

Thanks

[mbozek]

I haven't researched IRC 402A but I thought that if the participant was 59 1/2 and participated in the Roth account for 5 tax years there was no income tax on any distributions from the Roth. This is how it works for Roth IRAs.

Loan distributions from a roth are only taxable if there is a distribution of taxable earnings from the Roth. If all of the earnings in the Roth are non taxable because the participant meets the above rules for non taxable distributions I don't see how any portion of the loan distribution will be taxed.

[Lou S.]

I agree with mbozek and if he is terminated and therefore has a distributable event I believe the correct terminology in this case would be "Loan Offset" as opposed to the term "Loan Default".