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Lane! Recently, upon calling my current 403K plan holder to…

Hello Lane!Recently, upon calling my...
Hello Lane!Recently, upon calling my current 403K plan holder to inquire about paying off the remaining balance on my outstanding loan and to find out additional info regarding a future loan I was told that as per IRS regulations I would not be allow to do so till after a year post current loan pay off.So, unless I misunderstood what the representative told me or she simply misinformed me, I would really like to know what IRS regulation states such insanity and if this is indeed the case is there any other way that I can access my own money without getting hit with all kinds of tax fees as if I was not going to pay it back? I’ve been paying off my current loan quarterly, on my own (not deducted from my paycheck) for nearly 3 years and have always been on time, never missed a beat.Also, my employer is currently in the process of switching over from the current investment plan company, in which I still have the loan with, to another company effective at the beginning of this upcoming year. So, I’m curious to know that if by any chance I was to simply just pay off the loan while my employer is still with the current one will the above “one year wait issue” still be a barrier for me to try to re-borrow any of my money from the new investment plan company come January 2018?
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Answered in 27 minutes by:
11/24/2017
Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 14,642
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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First, it's possible that the plan document itself doesn't allow this (plans can do anything from not allowing loans at all to setting terms for how quickly you can take out a new loan, as long a it's in the plan document)

...

But they're getting the tax code limitations wrong. The only limitations that IRS ( better said the tax code) puts on borrowing are as follows: (I'll underline the pertinent part)

...

"The IRS allows you to take a loan for half the vested value of your 401(k) account, or $50,000, whichever amount is smaller. Some plans allow you to take out multiple loans until you reach the maximum amount. Borrowing limitations are placed on a 12-month period, even if you’ve paid the amount back early. For example, if the vested balance of your account is $200,000 and you take a $30,000 loan out in February, you won’t be permitted to take out more than $20,000 in additional funds again until the following February." (Master Tax Guide).

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Another, more complicated example: Assume your maximum loan amount is $50,000, the highest outstanding balance of your 401(k) loan during the previous 12 months was $35,000, and your 401(k) loan balance on the date you want to take out the second loan is $29,000. First, the difference between $35,000 and $29,000 is $6,000. Next, $50,000 minus $6,000 is $44,000. Finally, $44,000 minus $29,000 is $15,000, which is the maximum amount you could get for an additional loan.

...

But again THESE are the IRS (tax code) limitations. If your plan administrator's front lines clerk is confusing tax law with what the plan itself allows, this wouldn't be the first time.

Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 14,642
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Lane and 87 other Finance Specialists are ready to help you
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Customer reply replied 7 months ago
Yikes! I can totally see why this could possibly be an issue in regards ***** ***** clerk's explaination. Not an easy thing to explain or to understand lol! However, as usual you always do a great job at drawing a good picture and hence providing a better understanding of the situation at hand so I thank you for this! So just to be clear, then I wouldn't be able to pay it off with the current plan provider and then re-borrow with the new one come Jan 2018 or would they automatically transfer all that information to the new company hence forcing them to follow through with the same IRS tax code limitations?
Just wondering if I'll be starting off with a new slate once we're over at the new company and if so if I should just hurry and take advantage of paying it off now before the transfer takes place?
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