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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 13988
Experience:  15years with H & R Block. Divisional leader, Instructor
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I have a 401k loan of 30,000. I am 52 years old. If I quit

Customer Question

I have a 401k loan of 30,000. I am 52 years old. If I quit my current employment, what kind of taxes and penalties would I be liable for if I didn't repay the loan?
Submitted: 1 year ago.
Category: Tax
Expert:  Robin D. replied 1 year ago.

Hello,

If you were to default on the loan you would be taxed on the amount of the loan that you did not pay back.

You would be issued a 1099R for that amount and then add it to your income for the year. The tax rate would depend on your total income and filing status.

You would also have an additional 10% as a penalty unless you can claim an exception. One exception is amount of unreimbursed medical expenses ( 10% if under age 65).

Customer: replied 1 year ago.
I'm fairly healthy, are there any other exceptions?
Expert:  Robin D. replied 1 year ago.

The following six exceptions apply to distributions from any qualified retirement plan:

  • Distributions made to your beneficiary or estate on or after your death.
  • Distributions made because you are totally and permanently disabled.
  • Distributions made as part of a series of substantially equal periodic payments over your life expectancy or the life expectancies of you and your designated beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply.
  • Distributions to the extent you have deductible medical expenses that exceed 10% of your adjusted gross income (7.5% if you or your spouse is age 65 or over) whether or not you itemize your deductions for the year.
  • Distributions made due to an IRS levy of the plan under section 6331.
  • Distributions that are qualified reservist distributions. Generally, these are distributions made to individuals called to active duty for at least 180 days after September 11, 2001.

The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA (the 401k woudl be in the list too):

  1. Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55, or distributions made from a qualified governmental defined benefit plan if you were a qualified public safety employee (State or local government) who separated from service on or after you reached age 50.
  2. Distributions made to an alternate payee under a qualified domestic relations order, and
  3. Distributions of dividends from employee stock ownership plans.
Expert:  Robin D. replied 1 year ago.

Taking a loan is a better approach than a distribution unless you default. Then the balance is treated as a distribution so that can be tough.

Customer: replied 1 year ago.
A career change may be in order and I wanted to reduce my debt as much as possible so was thinking about defaulting as a way to reduce it. understanding that it is still going to cost me.
Expert:  Robin D. replied 1 year ago.

I understand and sometimes you have to weigh the benefits against the cost. If you would be paying less in the end (taxes against the interest on the debt) then it may be a good way to go.

Expert:  Robin D. replied 1 year ago.

I really enjoyed working with you – please feel free to request me again when you come back to ask another question.
Rating lets Just Answer know you were assisted and credits me for the time.

Best wishes

Expert:  Robin D. replied 1 year ago.