Retirement Planning/401K loan


QUESTION: I took a loan from my 401k out at the beginning of the year for 4500 when my house was about to be foreclosed on and am in the process of repaying it while still investing into my 401k.  Now there is rumors of my company laying people off or going bankrupt.  In the event that this happens what are my options if any to avoid penalty and paying taxes since obviously if I lose my job repayment in full is not an option?  Can I roll over into another plan or pay the repayment payments out of pocket?

ANSWER: Dear Angie,

It is my understanding that your loan becomes due at the time you are no longer working for the sponsoring employer. Therefore, you must find the money. Otherwise, assuming you are less than retirement age, you will be taxed and penalized.

Since you have that loan, I presume that your only asset is the remaining 401(k). Thus you are likely going to liquidate it as well. If you take a direct distribution from it, the administrator is required to withhold 20% of the account. If you do not restore it to an IRA within 60 days, that amount withheld and sent to the IRS, will also be subject to the tax and penalty.

More on 401(k)s can be found in Chapter 10 of my report, Life Insurance and 401(k)s - the Unvarnished Truth.' You can receive a copy of it by e-mailing me at

Willard R. Brumbaugh, LUTCF
CA License 0374776
(888) 792-2379

---------- FOLLOW-UP ----------

QUESTION: is there anyway to still pay the payment back out of pocket or another option?

If you are asking whether you can carry the loan out for the full period, or simply taking from other funds to pay it off?

If you mean just paying it off, sure. The question then becomes: From where do you get the funds?

A possible answer: Borrow from your life insurance policy. If you have a properly funded Whole Life or Universal Life policy, this would be the perfect source for emergencies like this. This is the topic of Chapter 8 of my report.

If this is not an option, it would be wise to budget for just such a policy. I would be happy to discuss this with you.

Willard R. Brumbaugh, LUTCF
CA License 0374776
(888) 792-2379  

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Willard R. Brumbaugh, LUTCF


I have answered many questions regarding 401ks, IRAs and annuities as well as life insurance. I have been counselling against most Qualified Plans since 1994.


Ranked in the top 5 in retirement catagories at most of its last 2 1/2 years. Organizations I belong to: National Association of Insurance and Financial Advisors-California
Inland Empire Estate Planning Council

Life Underwriters Training Council Fellow

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