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Question From a Reader: 401(k) Loan
By JLP | November 6, 2008
I received the following email last week:
Hi JLP,
I’ve read your blog about the 401k loan. However, it’s still unclear what to do in my case. I took out a 401k loan of $20,000 by June, 2008. The loan is payable within 5 years. However, I will be laid off by my current employer by the end of this month—November. The paperwork shows that I have to pay back the remaining loan within 90 days from the laid-off date. My question is do I have to pay back all the remaining loan by the end of this year (income tax year?) or by the end of the 90 days period (Feburary, 2009)
Also, do I have to add the 401k loan on top of my income this year?
Thanks in advance,
Kevin
First off, let me say I’m sorry to hear that you are being laid off. Hopefully, you’ll be working another job soon.
You have 90 days to pay back the loan, regardless of where it falls in the year.
If you do not pay it back, you will have to report it on your 2009 Federal Income Tax and will also be assessed a 10% penalty if you are under 59½ years of age. Your tax penalty could turn out to be some serious money if you don’t pay back the loan in time.
Whatever you decide, be sure and check with your human resources department and ask them for a copy of the rules. Also ask them if there’s anything they can do to help. The IRS allows plan providers certain leeway for decision making so it never hurts to ask. For additional help, check out these frequently-asked questions on the IRS website.
Best of luck to you, Kevin. Please keep us up-to-date on your transition.
Topics: 401(k), Retirement Planning | 5 Comments »
November 6th, 2008 at 4:56 pm
You may have a little bit of luck if Obama passes the temporary suspension of the 10% penalty (though you’ll still owe income taxes on what you didn’t pay back).
Kevin, I wish you best of luck in finding an even better job.
November 6th, 2008 at 5:50 pm
Kevin – Here’s what you do. You take out a tax free barrel bond and invest in in some penny stocks. by the end of the year you wouldn’t believe the return you will have. You should have enough money to pay the loan off and have a small savings while you look for a job.
November 6th, 2008 at 6:12 pm
@Kevin, you also might not get the match at the end of the day either. I really hope the 401k loan was for a make or break emergency, because the cost for not being able to repay in 90 days is going to be high.
November 7th, 2008 at 5:08 pm
@Danny, how would you presume Kevin raise the capital sufficient to invest to return? Second, really, you are suggesting pennies?
November 7th, 2008 at 5:15 pm
I’m pretty sure Danny is joking. If he’s not, he’s crazy!