401(k) Loan Setback

Q: I am 51 and was recently downsized from my job of 18 years. Prior to the downsizing, I had taken out a loan against my 401(k) and was paying it back. Since trying to continue making payments would be a hardship for me, I stopped. What should I do with the balance of approximately $6,000 that’s left in my 401(k) account?
— Y. Jones, Via the Internet

A: Unfortunately, your dilemma is bigger than simply figuring out what to do with what’s left in your 401(k). The unpaid balance of the loan you took out against your 401(k) will be counted as a distribution, which means you will have to pay a 10% early withdrawal penalty for taking money out before age 591/2, plus any income tax the balance has accrued.

You didn’t say how much you borrowed from your 401(k), but it’s disappointing to hear that you only have $6,000 left after 18 years at a company. At your next job with a tax-deferred retirement option, seriously consider making the maximum contribution to create a retirement nest egg. In the meantime, you can leave your old account alone and let it grow, you can transfer the money to a 401(k) at your new job, or you can roll the money from your old 401(k) into a traditional IRA. Under no circumstances should you cash out your 401(k). That would subject you to a mandatory 20% federal withholding tax and the additional 10% early withdrawal penalty.

2 Responses to 401(k) Loan Setback

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