He Will Retire in 2026 With a $42,000 Loan Still Open on His 401(k). The Plan Will Treat the Balance as a Distribution, and Medicare Will Read $42,000 He Spent Years Ago as 2026 Income
A retiree's final paycheck could trigger a tax bill on money he spent years ago, and Medicare will bill him for it two years later. A little-known rollover deadline gives him a way out, but only if he acts before…
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Consider a 64-year-old retiring in 2026 with $42,000 still owed on a 401(k) loan he took years ago. His plan requires repayment when he leaves. If he doesn’t repay it, the plan will deduct the balance from his account, turning money he spent years ago into taxable income.
Only a small group faces this. The Centers for Medicare & Medicaid Services (CMS) says the income-related monthly adjustment amount (IRMAA) affects roughly 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 an ordinary retiree over that line.
Why an Old Loan Becomes New Taxable Income
A 401(k) loan generally isn’t taxable when you borrow the money, provided it meets IRS limits and repayment rules. If he stops paying while still employed, the unpaid balance becomes a deemed distribution. That balance is taxable, and the IRS bars rolling it over unless the plan cuts his account to repay the loan.
A plan loan offset works differently. After he leaves the job, the plan uses part of his 401(k) balance to repay the loan. The amount counts as a distribution and is generally taxable unless he completes an eligible rollover.
Retiring does not, by itself, make the loan taxable. Some plans let former employees keep repaying by bank draft. Others give them time before the offset posts. The plan’s rules and whether he repays decide the result.
Medicare Prices His Premium Off the Tax Return
Assume he files single with $90,000 in other modified adjusted gross income (MAGI) in 2026. For IRMAA purposes, MAGI is adjusted gross income plus tax-exempt interest, so municipal bond income counts too. Adding the taxable offset brings his MAGI to $132,000.
Medicare sets premiums from the tax return filed two years earlier, so his 2026 return sets his 2028 premiums. It makes no difference whether he enrolls at 65 or is already on Medicare when the 2028 bill comes. The 2028 brackets will be adjusted for inflation, so the 2026 brackets below show only the scale of the hit:
| Scenario (2026 MAGI) | Total Monthly Part B Premium, Per Person | Monthly Part D Surcharge, Per Person |
|---|---|---|
| Single, no offset ($90,000) | $202.90 | $0 |
| Single, offset taxed ($132,000) | $284.10 | $14.50 |
| Single, over $137,000 | $405.80 | $37.50 |
| Married filing jointly, offset taxed ($132,000) | $202.90 | $0 |
At $132,000, he lands in the first level. At 2026 rates, the combined Part B and Part D surcharges cost him $1,148.40 a year, assuming he has both types of coverage. He is just $5,000 below the second level, where the surcharges rise to $2,884.80 a year. A final bonus or a year-end capital gain could push him over. A married couple filing jointly at the same income remains under the $218,000 joint threshold and pays the standard premium.
A single taxable event raising Medicare premiums two years later is exactly the kind of quiet IRS rule that catches retirees off guard. We listed it and 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, lower-income year. Social Security wants proof of the event and decides each case, so treat the form as a backup plan.
A Rollover Opportunity Many Miss
Because his loan was in good standing when he left and the offset resulted from his retirement, it qualifies for the extended rollover deadline. Federal law gives him until the due date of his 2026 tax return, including extensions, to roll it over. That beats the standard 60-day rollover window by months.
The catch: he never gets the $42,000 in cash. To complete the rollover, he has to deposit his own money, such as savings or his final paycheck, into an IRA or a new employer plan. Whatever he deposits comes off his taxable income. Rolling over $23,000 brings his MAGI back to $109,000 and the standard premium. Rolling over the full amount also wipes out the federal income tax on the offset.
Checklist Before the Last Paycheck
- Get the plan’s loan policy in writing. Ask whether former employees can keep repaying and how many days pass before the offset posts. Paying off the loan before that date solves the problem.
- Check how the plan labels the offset. Make sure the plan reports it on Form 1099-R as a qualified plan loan offset. A deemed distribution grants no rollover right.
- Run the IRMAA math before filing. If his 2026 MAGI lands between $109,000 and $137,000, a timely tax-filing extension can give him longer to fund the rollover. Any taxes owed are still due by the regular filing deadline.
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Gerelyn Terzo is the author of dividend investing handbook "Dividend Investing Strategies: How to Have Your Cake & Eat It Too." A veteran financial journalist, she covers agri-finance for outlets like Global AgInvesting and the broader stock market and personal finance for 24/7 Wall Street. She began at CNBC and later helped launch Fox Business in New York. Gerelyn currently resides in Woodland Park, Colorado and dabbles in nature photography as a hobby.
