What Happens to Your 401k Loan When You Quit?
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What happens to your 401k loan when you quit your job? If you have a 401k loan and leave your job, you have a few options. You can either repay the loan in full, roll it over into a new 401k, or let it default.
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Introduction
When you leave your job, you may wonder what will happen to the 401k loan you took out. After all, you’re no longer employed by the company that sponsors the retirement plan. You may be worried that you’ll have to immediately repay the loan in full or that defaulting on the loan could result in a hefty tax bill.
Fortunately, there are a few things that can happen to your 401k loan when you quit your job. In some cases, you may be able to roll over the loan into a new 401k plan. Or, if you can’t do that, you may be able to repay the loan over time without any penalties.
What Happens to the Principal?
The principal of your 401k loan is the amount that you originally borrowed, plus any interest that has accrued. When you leave your job, you will have a certain period of time to repay the loan in full. If you do not repay the loan in full within this time frame, the unpaid portion of the loan will be treated as a withdrawal and taxed accordingly.
What Happens to the Interest?
The interest on your 401k loan may be one of the most important factors to consider when deciding whether or not to take a loan from your retirement account.
Generally, when you leave your job, any outstanding balance on your 401k loan becomes due immediately. If you don’t have the money to pay it back, the loan is considered “defaulted” and the outstanding balance is treated as a taxable distribution. That means you’ll owe income taxes on the money you borrowed, plus a 10% early withdrawal penalty if you’re under age 59 1/2.
There are a few exceptions to this rule. If you’re laid off, unemployed, or facing financial hardship, you may be able to keep your loan outstanding for a period of time. And if you rollover your 401k balance to an IRA, you may be able to keep the loan outstanding indefinitely. However, these are rare exceptions and most people will be required to repay their 401k loan when they leave their job.
What Happens to the Loan Repayment Schedule?
Upon quitting your job, you will likely have to repay your 401k loan in full within 60 days. This repayment schedule is set by the IRS and is non-negotiable. If you do not repay the loan in full within this time frame, the outstanding balance will be considered a distribution from your 401k account and will be subject to income taxes and a 10% early withdrawal penalty.
How to Minimize the Taxes and Penalties
When you leave your job, you have a few options for what to do with your 401k loan. You can leave the money in your account, pay off the loan immediately, or roll the loan over into another retirement account.
If you leave the money in your account, you will still be responsible for paying back the loan plus any interest that has accrued. However, you will not be liable for any taxes or penalties.
If you pay off the loan immediately, you will not have to pay any taxes or penalties. However, you will lose any interest that has accrued on the loan.
If you roll the loan over into another retirement account, you will not have to pay any taxes or penalties. However, you may have to pay some fees to rollover the account.
Conclusion
As you can see, there are a few different things that can happen to your 401k loan when you quit your job. It all depends on the terms of your loan and your company’s policy. Be sure to check with your HR department before you resign to find out what will happen to any outstanding loan balance.
