Planning to cash out a retirement plan account that has outstanding loans?
You’re taxed on the gross distribution, not the net amount you receive
after the plan administrator repays the loans.
Here’s an example from the Tax Court:
A woman borrowed money from her retirement account on two separate occasions.
When she closed it, the administrator repaid the loan balances using account funds
and remitted the net amount to her. The gross payout was reflected on the 1099-R.
The Court denied her plea that only the net is taxed (Perry, TC Memo. 2018-90).