I quit my job about a month ago. I just couldn’t deal with my boss anymore. When I went to have my 401(k) transferred into an IRA, I was told that I have 60 days to repay the loan on my 401(k) or I will be taxed on the money. My first question is that true, and is there anything I can do. It will take me more than 60 days to repay the loan. My second question is, I am planning to file an extension on my 2018 tax return. Do I have to give the IRS a reason to file the extension and if I do, what are the justifiable reasons to file an extension?
I do have some good news for you. Whoever told you that you have to repay the loan within 60 days has not looked at the new tax law. Under the old tax law you generally had to repay a 401(k) within 60 days of withdrawal or the money would be taxed to you as a distribution. In fact, if you are under the age of 55 not only would you have to pay the tax on the distribution but you would also have to pay the early withdrawal penalty of 10 percent. However, because of the Tax Cuts and Jobs Act that the President signed in 2017, that is no longer the case. Under the new tax law you would not have to pay taxes or even a penalty if you repaid the loan by the due date of your tax return for the year you left your job. In addition, if you file an extension, your time period for the due date is extended for the extension period.
In this situation since you left your job in 2019 you can avoid all tax and penalties if you repaid the loan by April 15, 2020. In addition, if in 2020 you file an extension for your 2019 tax return, you will not have to repay the loan until October 15, 2020. My recommendation is that you immediately contact the company to let them know about the changes in the tax law, so that they don’t unnecessarily issue you a 1099. If they do issue you a 1099, you will need to have them file a corrected 1099.
With regard to filing an extension, you do not have to give the IRS a reason as extensions are automatic. You can automatically get a six-month extension from the IRS by completing Form 4868. However, it is important to keep in mind that it is an extension of time to file your return, not to pay your taxes. Therefore, it is important that you guesstimate your tax situation, and if you owe money to the IRS that you include that money with your extension. It is always important to remember that returns are due once a year, but tax payments are due quarterly.
I always tell people that filing for an extension is not going to increase your audit risk. Therefore, as opposed to rushing to file your tax returns where you can make mistakes, it is much better to file an extension.
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email him at Rick@bloomassetmanagement.com.