How to pay off a 401k Loan?

[Citylights18]

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@Anonymous wrote:

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@Citylights18 wrote:

One trick to paying off a 401k loan is to remember is that any dollar you pay to it pays back to your account.

For instance if you had a 50k loan out against an existing 100k balance and you lost your job and had to pay it back how would you handle it? Would you pay it the 50k back in full?

100k in the 401k, 50k loan

Pay 50k from line of credit.

150k now in 401k, 50k debt owed.

The question is do you have the 50k sitting around for this type of operation. Another way to do it, particualrly if you'll still be walking away with a six figure 401k is by dividing what you owe in half, two 25k increments. Pay 25k from a checking account to put 25,000 back into your 401k to increase it to 125k. Then use 25k of proceeds from the 401k to pay off the other half.

100k in 401k, 50k loan

Pay 25k from line of credit

Pay 25k out of 401k fund

100k in 401k, 25k debt owed.

Doing it this way you walk out with a smaller 401k fund but still substantial. However that cuts your debt in half if that is a particular issue as to how to pay it off. 100k in the 401k is still enough to have substantial money for trading and growth. If you had 300k in there you might want to just payoff the full 50k loan from the proceeds and move on. 

If you repaid the 50k loan out of the 100k 401k directly you'll be left with 50,000. That will hurt your money growth much more with only 50,000 available in your retirement plan.

100k in 401k, 50k loan

Pay 50k out of 401k fund

50k in 401k

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It's been a long time but.... if you repay the loans out the 401(k) directly, if you don't meet age and other qualifications, doesn't this count as a withdrawal, with tax and possible 10% penalties?   If not, it seems there would be a large loophole!

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I believe its just paying off the loan. When your 401k loan is due and you don't have alternative means to pay off your 401k loan the payoff happens automatically out of your proceeds.

The 10% penalty also really isn't much to contend with IF you have a lot of money already saved up in there.

[Anonymous]

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@Citylights18 wrote:

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It's been a long time but.... if you repay the loans out the 401(k) directly, if you don't meet age and other qualifications, doesn't this count as a withdrawal, with tax and possible 10% penalties?   If not, it seems there would be a large loophole!

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I believe its just paying off the loan. When your 401k loan is due and you don't have alternative means to pay off your 401k loan the payoff happens automatically out of your proceeds.

The 10% penalty also really isn't much to contend with IF you have a lot of money already saved up in there.

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It's the automatically out of your proceeds (by which I assume you really mean the account balance) that now counts as a withdrawal, which is possibly early and so gets the 10% penalty but is in any case subject to income tax.

As I said, otherwise this would be a loophole to avoid tax and penalties.     I have say $100K in my 401(k)   At age 40 I take a $50K loan, and that means $50K appears in my checking account.   I then don't pay it back (switch jobs maybe).  You are suggesting that all that happens is that my 401(k) balance reduces to $50K.     But that would mean I got $50K tax and penalty free!   I assure you the IRS will correct that!

[DSTforlife]

i thought if you leave a company, the loan is paid back using the 'unloaned' funds.  so, say you have 100k in your 401(k). if you take out a loan of 50k, there's 50k as a loan liability and 50k which is free to be invested.  if you leave the company and your loan balace is at 50k, the company will take the 50k of your free to be invested funds to pay the loan liability....which means you will have nothing to roll-over to another retirement account.  i don't think the cost to cover the loan is considered a withdrawl and subject to penalty.

this is why most companies will only allow for loans up to 50% of your 'free to be invested' balance.

[Anonymous]

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@DSTforlife wrote:

i thought if you leave a company, the loan is paid back using the 'unloaned' funds.  so, say you have 100k in your 401(k). if you take out a loan of 50k, there's 50k as a loan liability and 50k which is free to be invested.  if you leave the company and your loan balace is at 50k, the company will take the 50k of your free to be invested funds to pay the loan liability....which means you will have nothing to roll-over to another retirement account.  i don't think the cost to cover the loan is considered a withdrawl and subject to penalty.

this is why most companies will only allow for loans up to 50% of your 'free to be invested' balance.

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Your example would be very punitive!   You had $100K, took $50K and by not repaying lose all the 401(K)?, basically losing $50K investment!  

Basically the loan is a special withdrawal from the 401(K) so when you withdraw the $50k, the balance goes down by $50K, so there is nothing needed to recoup it for the employer.   There is just the tax treatment mandated by the IRS

From investopedia:

Still, leaving your employer when you have an outstanding 401(k) loan is restrictive, to say the least. You'll be forced to come up with the outstanding balance in less time, most likely, than the five years, you would customarily have. If you can't repay the money, the loan will be treated as a withdrawal, with all the attendant implications for paying income tax and penalties.

Now you have until the next Federal Tax return is due to repay, more than the previous 60 days.