401k: I borrowed from my account, have monthly payments, but want to leave job?

Question

I still have a few years worth of payments to make on the loan I took from my 401k, but I really want to leave my job. Would I be forced to pay it all back right then if I quit, would I be able to make payment arrangements, or what? Any help would be great. Thanks!

Answer 1

You might be...depends on the 401k plan. Some require immediate payback while others allow you to continue making payments so long as 1) it's paid back on a regular payment schedule (no less than quarterly payments) and 2) it's paid back before the original due date. You'll have to check with your company's plan administrators after you quit. Another option would be to consult with your NEW employers during the interview process to see if they would let you roll in a 401k loan. It's legal to do but many don't know this. If you go to a small company then it's worth a try.

They can't FORCE you to pay it back though. What they do is say "pay it back or we will distribute it to you and it will be taxable". But they can't distribute it to you until the end of the quarter FOLLOWING the quarter that you fail to make your first payment. This is important because it allows you to prepare ahead of time and maybe have a little more withheld from your regular paycheck to pay for the tax bill. This holds true unless you take a distribution of the rest of your money...so best to leave the rest in the plan until the loan becomes taxable then roll it over. An example of this is if you were to quit now and leave your money in the plan then it wouldn't go into default until March 31, 2008 so you'd have until December of 2008 to have enough withheld to offset those taxes.

Taxes are another thing to consider....if you roll over your balance and the loan there is no taxable event. If you roll over your balance but not your loan then you will be taxed and penalized ONLY on the loan amount. They will not withhold anything to offset these taxes. If you take a cash distribution then they will hold 20% of the cash PLUS 20% of the loan balance for tax withholding. In addition come tax time you'll owe the 10% penalty for early withdrawal on both the cash AND the loan.

Answer 2

When I left my previous job, HR told me that if I have less than $5000, I have to cash it out or roll it over to an IRA account or into a new 401k account. But if it's more than that, I can leave it in that account. The only difference is, my previous job will no longer match my contributions.

In a case of a loan, you still have to pay it back by law regardless of who your current employer is. You can leave your current job and still keep your 401k account, the only thing you'll lose is the contribution matching benefit, if your current employee have this.

As for re-payment arrangements, you need to consult the company who's holding your 401k account, since their policy may be different from other...I'm not really sure.

Answer 3

If you leave the job, you will have to immediately pay the entire loan or it will be designated a distribution. You will have to pay a 10% penalty for early withdrawal and income taxes.