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Loans Treated as Distributions: Pension and Annuity Taxes (2025 IRS Guide)

This guide covers “Loans Treated as Distributions” within pension and annuity taxes. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 575 (2025), Pension and Annuity Income, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

This section of the publication explains how any nonperiodic distributions you receive under a pension or annuity plan are taxed. Nonperiodic distributions are also known as amounts not received as an annuity. They include all payments other than periodic payments and corrective distributions.

For example, the following items are treated as nonperiodic distributions.

  • Cash withdrawals.

  • Distributions of current earnings (dividends) on your investment. However, don’t include these distributions in your income to the extent the insurer keeps them to pay premiums or other consideration for the contract.

  • Certain loans. See Loans Treated as Distributions, later.

  • The value of annuity contracts transferred without full and adequate consideration. See Transfers of Annuity Contracts, later.

Loans Treated as Distributions

If you borrow money from your retirement plan, you must treat the loan as a nonperiodic distribution from the plan unless it qualifies for the exception to this loan-as-distribution rule explained later. This treatment also applies to any loan under a contract purchased under your retirement plan, and to the value of any part of your interest in the plan or contract that you pledge or assign (or agree to pledge or assign). It applies to loans from both qualified and nonqualified plans, including commercial annuity contracts you purchase directly from the issuer. Further, it applies if you renegotiate, extend, renew, or revise a loan that qualified for the exception below if the altered loan doesn’t qualify. In that situation, you must treat the outstanding balance of the loan as a distribution on the date of the transaction.

You determine how much of the loan is taxable using the allocation rules for nonperiodic distributions discussed under Figuring the Taxable Amount, earlier. The taxable part may be subject to the additional tax on early distributions. It isn’t an eligible rollover distribution and doesn’t qualify for the 10-year tax option.

Exception for qualified plan, 403(b) plan, and governmental plan loans.

At least part of certain loans under a qualified employee plan, qualified employee annuity, tax-sheltered annuity (403(b) plan), or governmental plan isn’t treated as a distribution from the plan. This exception to the loan-as-distribution rule applies only to a loan that either:

  • Is used to acquire your main home, or

  • Must be repaid within 5 years.

If a loan qualifies for this exception, you must treat it as a nonperiodic distribution only to the extent that the loan, when added to the outstanding balances of all your loans from all plans of your employer (and certain related employers, defined later), exceeds the lesser of:

  • $50,000; or

  • Half the present value (but not less than $10,000) of your nonforfeitable accrued benefit under the plan, determined without regard to any accumulated deductible employee contributions.

You must reduce the $50,000 amount if you already had an outstanding loan from the plan during the 1-year period ending the day before you took out the loan. The amount of the reduction is your highest outstanding loan balance during that period minus the outstanding balance on the date you took out the new loan. If this amount is zero or less, ignore it.

Substantially level payments.

To qualify for the exception to the loan-as-distribution rule, the loan must require substantially level payments at least quarterly over the life of the loan. If the loan is from a designated Roth account, the payments must be satisfied separately for that part of the loan and for the part of the loan from other accounts under the plan. This level payment requirement doesn’t apply to the period in which you are on a leave of absence without pay or with a rate of pay that is less than the required installment. Generally, this leave of absence must not be longer than 1 year. You must repay the loan within 5 years from the date of the loan (unless the loan was used to acquire your main home). Your installment payments after the leave ends must not be less than your original payments.

However, if your plan suspends your loan payments for any part of the period during which you are in the uniformed services, you won’t be treated as having received a distribution even if the suspension is for more than 1 year and the term of the loan is extended. The loan payments must resume upon completion of such period and the loan must be repaid in substantially level installments within 5 years from the date of the loan (unless the loan was used to acquire your main home) plus the period of suspension.

Example 1.

On May 1, 2025, you borrowed $40,000 from your retirement plan. The loan was to be repaid in level monthly installments over 5 years. The loan wasn’t used to acquire your main home. You make 9 monthly payments and start an unpaid leave of absence that lasts for 12 months. You weren’t in the uniformed services during this period. After the leave period ends and you resume active employment, you resume making repayments on the loan. You must repay this loan by April 30, 2030 (5 years from the date of this loan). You can increase your monthly installments or you can make the original monthly installments and on April 30, 2030, pay the balance.

Example 2.

The facts are the same as in Example 1, except that you are on a leave of absence performing service in the uniformed services for 2 years. The loan payments were suspended for that period. You must resume making loan payments at the end of that period and the loan must be repaid by April 30, 2032 (5 years from the date of the loan plus the period of suspension, which is 2 years in this example).

Related employers and related plans.

In determining loan balances for purposes of applying the exception to the loan-as-distribution rule, you must add the balances of all your loans from all plans of your employer and from all plans of your employers who are treated as a single employer. Treat separate employers’ plans as plans of a single employer if they are treated that way under other qualified retirement plan rules because the employers are related.

Employers are related if they are:

  • Members of a controlled group of corporations,

  • Businesses under common control, or

  • Members of an affiliated service group.

An affiliated service group is generally two or more service organizations whose relationship involves an ownership connection. Their relationship also includes the regular or significant performance of services by one organization for or in association with another.

Denial of interest deduction.

If the loan from a qualified plan isn’t treated as a distribution because the exception applies, you can’t deduct any of the interest on the loan during any period that:

  • The loan is secured by amounts from elective deferrals under a qualified cash or deferred arrangement (section 401(k) plan) or a salary reduction agreement to purchase a tax-sheltered annuity, or

  • You are a key employee as defined in section 416(i) of the Internal Revenue Code.

Reporting by plan.

If your loan is treated as a distribution (deemed distribution), you should receive a Form 1099-R showing code “L” in box 7. If your loan is treated as a qualified plan loan offset, you should receive a Form 1099-R showing code “M” in box 7. If your loan is not a qualified plan loan offset, no code will be reported on Form 1099-R for the offset.

Effect on investment in the contract.

If your loan is treated as a distribution, you must reduce your investment in the contract to the extent that the distribution is tax free under the allocation rules for qualified plans, explained earlier. Repayments of the loan increase your investment in the contract to the extent that the distribution is taxable under those rules.

If you receive a loan under a nonqualified plan other than a 403(b) plan, including a commercial annuity contract that you purchase directly from the issuer, you increase your investment in the contract to the extent that the distribution is taxable under the general allocation rule for nonqualified plans, explained earlier. Repayments of the loan don’t affect your investment in the contract. However, if the distribution is excepted from the general allocation rule (for example, because it is made under a contract entered into before August 14, 1982), you reduce your investment in the contract to the extent that the distribution is tax free and increase it for loan repayments to the extent that the distribution is taxable.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.

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