Leaving Your Job With an Outstanding 401(K) Loan

Jun 12, 2023
Est. Read Time: 2 minutes

401(k) Loan Options

At IRA Club, we frequently hear, “I want to leave my job, however, I still have an outstanding loan I took from my 401(k).”  The old answer was not very encouraging as there were only two options:

  1. Pay back the loan balance and then leave the employer.
  2. Leave the employer without paying off the loan.

If you were to choose option two, the old 401(k) plan would categorize the unpaid balance as an early 401(k) distribution and send a Form 1099 for the amount outstanding. If you are not yet 59½, the IRS will tax you on the unpaid balance (as a distribution) plus charge them extra taxes for taking an early distribution (early distribution penalty).

Neither of the above options are very appealing. However, there is now a third option:

  1. Leave your job, transfer the 401(k) balance to an IRA, then simply pay off the loan by putting extra dollars into the new IRA.

When Are Taxes Due?

So how long do I have to complete paying back the loan amount to the IRA account? Until the next federal tax return is due. For example: If you leave your current employer in November and transfer the balance in the 401(k) to an IRA account, you now have till April 15th to pay off the loan. If you asked for an extension to file your return, you would have until October 15th to pay off the loan.


For information about a Self Directed IRAs, Solo 401(k)s, or alternative investments,
call IRA Club at 312-795-0988 or click here to schedule a call.


IRA Club offers no investments, products, or planning services. Therefore, please consult your attorney, tax professional, financial planner, and any other qualified person before making any investments. Be advised that IRA Club does not evaluate, review, monitor, recommend, warrant, guarantee, or otherwise endorse the legality, tax treatment, propriety, performance, or reliability of any investment, service, statement, opinion, or other representation provided with respect to the investment opportunities listed on its site or their sponsors or providers. IRA Club has no financial arrangement, partnership, joint venture, or other affiliation with the sponsors or providers of these investments. IRA Club shall not be liable for any misinformation, misrepresentation, negligence, act, omission, investment results, or any wrongdoing with respect to any of these investments or their sponsors or providers.

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