He Plans to Retire With a $42,000 401(k) Loan Still Outstanding, and the Offset Could Count as Income for Medicare

Quick Read

• An unpaid $42,000 401(k) loan turns into taxable income when he leaves work, and the plan reduces his account to settle it.

• That added income could lift his $132,000 total above Medicare's $109,000 single-filer threshold, increasing his Part B and Part D costs in a later year by about $1,148 annually.

• He may be able to roll over the offset amount with his own cash before his tax-return deadline, which can eliminate both the tax hit and the Medicare surcharge.

• The biggest 401(k) decisions are often made once and then never revisited: when to roll over money, what to invest in, and when to begin withdrawals. That is what the report 401k & IRA Tips and Answers was built to explain, and it is available free for a limited time. (Sponsor)

Consider a 64-year-old who retires with $42,000 still owed on a 401(k) loan he took out years earlier. His plan says the loan must be repaid when he leaves. If he cannot repay it, the plan will offset the balance against his account, converting money he already spent into taxable income.

Only a relatively small share of retirees face this issue. The Centers for Medicare & Medicaid Services says the income-related monthly adjustment amount, or IRMAA, affects about 8% of Part B enrollees. A single filer at or below $109,000 in income pays the standard premium. A loan offset can be the kind of one-time event that pushes a retiree beyond that limit.

Why an Old Loan Becomes New Taxable Income

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

A plan loan offset works differently. Once he separates from the job, the plan uses part of his 401(k) balance to repay the loan. The offset is treated as a distribution and is generally taxable unless he completes a qualifying rollover.

Retirement itself does not automatically make the loan taxable. Some plans allow former workers to keep making payments by bank draft. Others give them time before the offset is posted. The plan's rules, and whether he repays, determine the outcome.

Medicare Sets Premiums From the Tax Return

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

Medicare bases premiums on the tax return from two years earlier, so the return from the retirement year determines premiums two years later. It does not matter whether he enrolls at 65 or is already on Medicare when the higher bill arrives. The brackets in effect two years later will be adjusted for inflation, so the figures below are meant to show the scale of the increase:

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

A one-time taxable event that raises Medicare premiums later is exactly the sort of quiet IRS rule that can surprise retirees. We included it, along with eight others, in a free tax trap map.

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

A Rollover Opportunity Many Miss

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

The catch is that he never receives the $42,000 in cash. To complete the rollover, he must use his own money, such as savings or a final paycheck, to deposit the amount into an IRA or a new employer plan. Whatever he contributes 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.

Checklist Before the Last Paycheck

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(sponsor) 401(k)s are powerful retirement tools. But even experienced savers can make mistakes that quietly cost money for years. Choosing the wrong fund, overlooking small fees, or handling rollover steps in the wrong order can all create expensive problems.

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