401k Loans in Default - Rollover IRA

[ibeetb]

What is the name of your state? VA

I had about 7K in 401k loans that I defaulted on recently when leaving my employer. I was told by Fidelity that in order to minimize my tax liability for next year, I have 60 days to pay cash into a Rollover IRA and decrease the amount I would have to pay taxes on next year. Is this true? If I pay 3K into this rollover IRA, would it decrease my tax liability to just 4K instead of 7K. The IRS said that Rollover IRA has nothing to do with my defaulted loan. I am terribly confused. Of course, I want to minimize my liability to Uncle Sam in any way possible

[efflandt]

Assuming you left the employer in 2007 while eligible for that employer's retirement plan (as indicated on your W-2), the only immediate tax benefit you could get from a deposit to an IRA is if your 2007 income is low enough that you are eligible to make a tax deductable "contribution" to an IRA. That deductable limit is lower than if you were never eligible for employer's retirement plan during 2007 (or may be totally non-deductable).

The only way to get out of tax and 10% penalty for the 401(k) loan default would be (or would have been) to pay back what you could by the deadline for that plan. According to IRS Pub 575 a defaulted retirement plan loan does not qualify as a rollover. See pages 17 and 26 of [url]http://www.irs.gov/pub/irs-pdf/p575.pdf[/url]