first, i know im an id--t for taking out a 401k loan. had a life sit where i had no choice.
expecting a layoff (medical exception for remote, but still going into the office some days) and wondering if the loan comes out of the 401k funds or out of final paychecks. i'd assume after the 60 day working period is over?
TIA
14 replies (most recent on top)
So much bs information! I was in the same boat. Laid off in February. After the 60 day period the payments stopped coming out of my check. Empower redid the paperwork and now I have an ACH payment coming out monthly that is equivalent to the 2 payments I had coming out of my check. They gave me several options. My goal is to pay it off before end of severance. Also I am 55 and leaving the funds in the 401k, there isn’t a penalty for me. Taxes yes, penalty no. However, if/when I roll it over to an IRA, there would then be a penalty if I needed to withdraw before 59 1/2. You can no longer contribute to it, so what to do with those funds is another decision. I found a high interest rate savings for now.
This is in the displacement materials. You can still work with empower and send bi-weekly checks or have ach payments in the amount you are paying today to pay off loan
@kew . Not possible. the IRS prohibits loans in Ira’s.
If you are displaced/terminated at that point you have a certain period to repay the remaining balance of the loan. Otherwise, the entire loan amount is treated as a taxable retirement distribution for the current year. You would also be charged additional 10% early withdrawal penalty if under age 59 1/2 or it doesn't qualify for a COVID or other IRS rule to waive the penalty.
Call Empower. But other places I have worked at when this has happened, you can continue paying the loan back to the 401k company as long as you leave it with them. Yes you might have to send it to them directly when severance ends or if you take a lump sum. All 401k plans are different so you have to call and check.
Look into rolling the loan over into an IRA.
regardless of where the interest goes you are laying it back with post tax money plus missing out on and gains you may have had on the money. Life happens so don't blame anyone for needing to take a 401k loan, but you end up being out quite a bit when all is said and done.
I learned this recently, the interest you pay for 401K loan actually goes back to your own account. Hope this helps some people.
"A loan lets you borrow money from your retirement savings and pay it back to yourself over time, with interest—the loan payments and interest go back into your account."
The loan record is changed to a distribution which is taxable & 10% penalty if under age 55 unless you can pay it back in full before your termination date. They do not pay it off from existing balance. This is standard with most plans.
The loan has already reduced your balance in the 401k. It will become a taxable event if not paid back by official termination date.
Call the service center and talk to someone. Too important to guess.
OP, if you can't repay the loan, the remaining balance gets converted to an early disbursement, so there's the usual taxes on that, but that's it. Not optimal but not the end of the world either.
During the severance period, will the loan payments continue to be deducted as they are from a normal paycheck?
Not an id--t, situations happen.
And I’m not totally clear on your question so I am going to make an assumption.
401k loans come out of the 401k balance in your account. If you lose your job the debt is typically immediately called by the lender and repayment will come from wherever you can send the money from. Your 60 days you’re still
Employed so it won’t be called until after that.