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J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return by J.K. Lasser Institute

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7.16 Restrictions on Loans From Company Plans

Within limits, you may receive a loan from a qualified company plan, annuity plan, 403(b) plan, or government plan without triggering tax consequences. The maximum loan you can receive without tax is the lesser of 50% of your vested account balance or $50,000, but the $50,000 limit is subject to reductions where there are other loans outstanding; see below. Loans must be repayable within five years, unless they are used for buying your principal residence. Loans that do not meet these guidelines are treated as taxable distributions from the plan. If the plan treats a loan as a taxable distribution, you should receive a Form 1099-R with Code L marked in Box 7.

If your vested accrued benefit is $20,000 or less, you are not taxed if the loan, when added to other outstanding loans from all plans of the employer, is $10,000 or less. However, as a practical matter, your maximum loan may not exceed 50% of your vested account balance because of a Labor Department rule that allows only up to 50% of the vested balance to be used as loan security. Loans in excess of the 50% cap are allowed only if additional collateral is provided.

If your vested accrued benefit exceeds $20,000, then the maximum tax-free loan depends on whether you borrowed from any employer plan within the one-year period ending on the day before the date of the new loan. If you did not borrow within the year, you are not taxed on a loan that does not exceed the lesser of $50,000 ...

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