How much mandatory withholding is applicable if Lisa takes her 401(k) plan loan as a distribution?

How much mandatory withholding is applicable if Lisa takes her 401(k) plan loan as a distribution?

• A. $1,800
• B. $3,200
• C. $5,000
• D. $6,800

Answer: (A)

When an individual takes a loan from their 401(k) plan, it is generally considered to be a loan and not a distribution, which means it typically does not incur mandatory withholding. However, if the loan is treated as a distribution, for example, if the individual fails to repay the loan according to the plan's terms, then the amount of the loan that is considered a distribution would be subject to mandatory withholding rules. The mandatory federal income tax withholding for a distribution from a 401(k) is typically set at 20%. In this scenario, if Lisa's distribution equates to a specific amount, calculating 20% of that amount would give the correct figure for withholding. For instance, if the withholding comes out to $1,800 based on the amount considered distributed, this indicates that the total distribution amount was $9,000 (since $9,000 multiplied by 20% equals $1,800). Thus, if the context of the question indicates that Lisa is subject to mandatory withholding due to the treatment of the loan as a distribution, then the amount of $1,800 signifies that the final calculated tax withholding corresponds accurately to the assumed distribution amount based on IRS regulations.

When an individual takes a loan from their 401(k) plan, it is generally considered to be a loan and not a distribution, which means it typically does not incur mandatory withholding. However, if the loan is treated as a distribution, for example, if the individual fails to repay the loan according to the plan's terms, then the amount of the loan that is considered a distribution would be subject to mandatory withholding rules.

The mandatory federal income tax withholding for a distribution from a 401(k) is typically set at 20%. In this scenario, if Lisa's distribution equates to a specific amount, calculating 20% of that amount would give the correct figure for withholding. For instance, if the withholding comes out to $1,800 based on the amount considered distributed, this indicates that the total distribution amount was $9,000 (since $9,000 multiplied by 20% equals $1,800).

Thus, if the context of the question indicates that Lisa is subject to mandatory withholding due to the treatment of the loan as a distribution, then the amount of $1,800 signifies that the final calculated tax withholding corresponds accurately to the assumed distribution amount based on IRS regulations.