When is a loan not quite a loan?

So you took a loan from your 401K, because after all, if you were going to pay interest, you wanted to pay it to yourself, and there is some validity in that.  However, you hadn't bargained on losing your job before you repaid the loan.   You borrowed $20,000, repaid $5,000 and had an outstanding loan of $15,000.   If you get terminated with a 401K loan outstanding, you are required to pay the entire remainder in a very short time period, back to your company.  If  you are unable to do so,  then the loan morphs into a taxable distribution.  Now that $15,000 is added to your income and you will pay federal income taxes on it.   If you were under 59 and a half, you have another little surprise coming, you will also have that dastardly 10% penalty to contend with.  Of course you may be able to avoid some or all of the penalty if you qualify for any of the exceptions.

So of course you weren't planning on losing your job, and you probably weren't planning on having a loan called in, or on increasing your taxable income by the outstanding loan amount, but that's what happens with a 401K loan if you lose your job, before you have completely repaid it.

So terminations can creep up on you, but if you see the writing on the wall work on a plan to repay as much of that loan as soon as you can before the axe falls, or be prepared to pay anywhere from 20 to 45% in taxes and penalty depending on your tax bracket.  Painful, but planning always eases pain.

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"No matter who you are, making informed decisions about what you do with your money, will help build a more stable financial future for you and your family." Alan Greenspan