He Plans to Retire Leaving a $42,000 401(k) Loan Unpaid. That Balance Could Count as Income, and Medicare Could Price His Premiums Years Later

A retiree’s last paycheck can set off a tax charge on money he spent long ago, and Medicare can raise his bill two years afterward. A little-known rollover deadline may help, but only if he moves before the clock runs out.

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Imagine a 64-year-old who retires with $42,000 still outstanding on a 401(k) loan he took years earlier. His plan says the debt must be repaid when he leaves. If he does not repay it, the plan will reduce his account by the unpaid amount, turning money already spent into taxable income.

Only a relatively small share of people are affected. The Centers for Medicare & Medicaid Services (CMS) says the income-related monthly adjustment amount, or IRMAA, applies to about 8% of Part B enrollees. A single filer with income at or below $109,000 pays the standard premium. A loan offset is the kind of one-time event that can push a retiree over that limit.

How an Old Loan Can Become Taxable Income Again

A 401(k) loan is usually not taxed when the money is borrowed, as long as it follows IRS limits and repayment rules. If the borrower stops paying while still employed, the unpaid balance becomes a deemed distribution. That amount is taxable, and the IRS generally does not allow it to be rolled over unless the plan applies the balance to the loan.

A plan loan offset works differently. After the worker leaves the job, the plan uses part of the 401(k) balance to satisfy the loan. The offset is treated as a distribution and is generally taxable unless an eligible rollover is completed.

Retiring does not automatically make the loan taxable. Some plans allow former employees to keep making payments by bank draft. Others give a grace period before the offset is processed. The plan’s rules and whether the loan is repaid determine the outcome.

Medicare Uses Taxable Income to Set Premiums Later

Suppose he files as a single taxpayer with $90,000 in other modified adjusted gross income, or MAGI, in 2026. For IRMAA purposes, MAGI is adjusted gross income plus tax-exempt interest, so municipal bond income is included too. Adding the taxable offset lifts his MAGI to $132,000.

Medicare bases premiums on the tax return from two years earlier, so a 2026 return affects 2028 premiums. It does not matter whether he signs up at 65 or is already on Medicare when the 2028 bill arrives. The 2028 brackets will be adjusted for inflation, so the 2026 figures below are only meant to show the size of the increase:

At $132,000, he falls into the first surcharge tier. Using 2026 rates, the combined Part B and Part D surcharges would total $1,148.40 a year, assuming he has both forms of coverage. He is only $5,000 below the next tier, where the annual surcharge jumps to $2,884.80. A year-end bonus or capital gain could push him over. A married couple filing jointly at the same income would still remain below the $218,000 joint threshold and pay the standard premium.

A single taxable event that raises Medicare costs two years later is exactly the kind of quiet IRS rule that can surprise retirees. We listed it, along with eight others, in a free tax trap map.

Retirement counts as a work stoppage on Form SSA-44, so he can ask Social Security to use a later year with lower income. Social Security requires proof of the event and reviews each case individually, so the form should be treated as a backup option.

A Rollover Window Many People Overlook

Because the loan was current when he left and the offset happened because of retirement, it qualifies for an extended rollover deadline. Federal law gives him until the due date of his 2026 tax return, including extensions, to complete the rollover. That is far longer than the usual 60-day rollover window.

The catch is that he never receives the $42,000 in cash. To make the rollover work, he must use his own funds, such as savings or a final paycheck, and place that money into an IRA or a new employer plan. Any amount he rolls over reduces his taxable income. Rolling over $23,000 would bring his MAGI back to $109,000 and restore the standard premium. Rolling over the full amount would also eliminate the federal income tax on the offset.

What to Check Before the Final Paycheck Arrives

1. Get the loan rules in writing. Ask whether former employees may continue repaying and how long it takes before the offset is processed. Paying off the loan before that point solves the issue.
2. Confirm how the plan reports the offset. Make sure the plan shows it on Form 1099-R as a qualified plan loan offset. A deemed distribution does not create rollover rights.
3. Calculate the IRMAA impact before filing. If his 2026 MAGI falls between $109,000 and $137,000, a timely extension for filing the tax return can give him extra time to fund the rollover. Any taxes owed are still due by the normal filing deadline.