Retirement Planning/Loan Question
Hi David, I recently took a loan out on my 401k for $8000. It looks like im now going to change jobs. My new employer does not offer a 401k so it seems what I need to do is repay the loan with cash and then roll it into a new IRA. From what ive been reading it seems once im terminated from my company the 401k will just sit there until I decide what to do with it, however the loan will need to be paid back in 60 days. Is this information accurate? Is there any advice you can provide? Thank you so much for your time.
Once you leave a job, any remaining 401k loan balance that is not repaid within usually 60 days as you stated will count as a withdrawal. This means you would be charged federal and state taxes(if applicable) plus a 10% early withdrawal penalty. You would pay this on your 2013 return. So you could pay it back within the 60 days and avoid all of that or you could contribute to an IRA to offset some of the taxes. The 2013 IRA contribution limit is $5500 or $6500 if you are over 50. Of course, if you are married, you could open a spousal IRA for your wife, so that would double your contribution limit. That would offset some or all of the taxes, however you would still owe the 10% penalty. That may not be so bad when you take into account that 401k loans are repaid with after tax money so when you repay the loan and withdraw the money later, you are being taxed twice. I do recommend that when you leave an employer to rollover your 401k to an IRA. This will give you more control, more investment options and possibly lower fees. I hope this answers your question. Let me know if I can be of further assistance. Good luck!