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Hello, I currently have a $25k loan against my 401K. I am planning on retiring this year at age 54. If I retire without paying back the loan, I know it will be considered a taxable distribution added to income plus a 10% penalty, so taxes will be owed. Will I still be able to take out penalty free withdrawls from the 401K when I turn 55, or will this distribution count against me?

Dear Michael,

The following quote I received from Wells Fargo.

"Penalty-free distributions can be taken if you’re:
Age 55 or older when you separate from service from your employer. Although distributions from
the plan are included in your taxable income, the penalty will not apply to any amounts you received if you separated from service during or after the year you reached age 55.

"Individuals who are employed in a public safety capacity — such as police officers, firefighters, and emergency medical technicians — now have the option to distribute their governmental pension plan assets without any penalties, if they are 50 or older when separating from service."

This leaves open the issue of retiring before 55 when not being one of the above. However, I do not believe that the current loan and its tax and premature distribution penalty has any bearing on what you choose to do later. This is only my opinion. You may get a more reliable answer from your HR officer.

Willard R. Brumbaugh


Retirement Planning

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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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