Author Topic: Penalty from not repaying 401k loan.  (Read 984 times)

dollarchaser

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Penalty from not repaying 401k loan.
« on: July 12, 2018, 09:28:10 AM »
I'm going to research this scenario.

I did a 401k loan (first time) and might quit before repaying it. The freedom of having money allowed me to buy my retirement home early and am under contract to sell the clown house. No closing costs, pmi,mortgage interest, saved bazillion.

The choice going forward would be refinance into a typical loan and repay 401k. BUT YUCK. That doesn't make sense from a cost standpoint.

So I realize the cost comparison must include the early withdrawal penalties and loss of growth. And (help fill in the rest).  But keeping the house paid off will allow us to pursue more satisfying work instead of chasing money for housing expenses.

terran

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Re: Penalty from not repaying 401k loan.
« Reply #1 on: July 12, 2018, 10:44:46 AM »
This is based on no research, so I may have run across this somewhere or it might just be an educated guess, but I suspect it will be considered a distribution from the 401(k), so you'll pay tax on it just like any other distribution and if you're under 59 1/2 you'll also pay a 10% early withdrawal penalty. If your plan allows it and you turn 55 in the year you terminated employment then that could also work for avoiding the penalty.

NathanP

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Re: Penalty from not repaying 401k loan.
« Reply #2 on: July 12, 2018, 11:18:09 AM »
Typically you will get 60 days to repay the loan if you leave your employer. Otherwise, the loan balance will be treated as taxable income and the 10% penalty will apply as mentioned above.

You would have to do the math to determine if repayment is the better option when considering the tax implications.

dollarchaser

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Re: Penalty from not repaying 401k loan.
« Reply #3 on: July 12, 2018, 07:48:19 PM »
My napkin calculations are


10% penalty =$3500
Taxable 35k = 12% bracket =$4200

$7700 with out calculating what lost gains would be. Monthly budget would be 300-500 lower than with a note/loan on home.

Still in contemplating mode.

FIreDrill

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Re: Penalty from not repaying 401k loan.
« Reply #4 on: July 12, 2018, 09:56:32 PM »
So are you leaving your job soon resulting in the 401k loan repayment being required?

If the cost of refinancing the home is close to the cost of the 10% penalty and taxes then I would probably just tax the 401k distribution hit.

If the closing costs of the home are equal to the distribution costs then you are really just comparing a guaranteed return on investment of the mortgage rate versus what you might make in the stock market.  Say 4.25% vs 9.6%.



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seattlecyclone

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Re: Penalty from not repaying 401k loan.
« Reply #5 on: July 13, 2018, 01:25:28 AM »
Others are correct about the tax implications of not repaying the loan.

You mention that you have your old home under contract to sell. Will you be receiving some cash back from that sale to allow you to repay part or all of the 401(k) loan? If so, why not wait to quit your job until after the sale closes?

Indexer

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Re: Penalty from not repaying 401k loan.
« Reply #6 on: July 17, 2018, 09:09:38 PM »
Something to check on, some employers let you make payments towards the 401k loan after you terminate employment. I speak from personal experience.

It's pretty rare, most require you pay back the loan within 60 days, but there are exceptions. Call your HR and ask.

Paul der Krake

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Re: Penalty from not repaying 401k loan.
« Reply #7 on: July 17, 2018, 09:23:28 PM »
The 2017 tax reform has made this more flexible, you don't have to repay within 60 days anymore.

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-loans

Specifically, this part:

Quote
Effective January 1, 2018, if the plan loan offset is due to plan termination or severance from employment, instead of the usual 60-day rollover period, you have until the due date, including extensions, for filing the Federal income tax return for the taxable year in which the offset occurs.

So file for extension on your 2018 taxes and that gives you until October 2019.

I'd still contact your 401(k) provider and/or read the plan description very carefully, just in case.

dollarchaser

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Re: Penalty from not repaying 401k loan.
« Reply #8 on: July 22, 2018, 08:39:15 PM »
Thanks for the responses. My old house could provide some funds for payment. Super cool going through this experience.
Will be adding to the FU story thread.

FireHiker

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Re: Penalty from not repaying 401k loan.
« Reply #9 on: July 24, 2018, 05:24:31 PM »
I know that a co-worker was able to continue paying his 401k loan (to Vanguard) after leaving the company. He just had to make arrangements to pay it himself instead of having it automatically deducted from his paycheck. So, it is not always a certainty that 401k loans are immediately required to be paid in full upon leaving a company. I recommend you check with your specific provider.