Have a Tax Question? Ask a Tax Expert
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).
The following six exceptions apply to distributions from any qualified retirement plan:
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):
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.
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.
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