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:
- Pay back the loan balance and then leave the employer.
- 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:
- 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.
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