@catspaw21 wrote:
thanks. it certainly seems there is no way around it. i have the extension. i was hoping to make a payment towards the loan - but i can't do that and pay the taxes too!
The other thing about paying back the loan is you don't get a tax break for it, but it creates a taxable basis in the 401(k). (This can get complicated to explain.)
For example, suppose you have $100,000 in your plan in a S&P index fund, and you borrow $50,000. Now your plan assets are a $50,000 index fund and a $50,000 loan to yourself; the loan is counted as a plan asset. Even though you get the deemed distribution, the loan is still considered a plan asset. But now, if you pay it off, that becomes a taxable basis in the account. Suppose you manage to pay back the entire loan over time. You don't get any tax deduction for repaying the loan, but now your plan assets consist of $50,000 of pre-tax and $50,000 of after-tax assets. In the end, that means that when you make withdrawals in retirement, your withdrawals would only be 50% taxable instead of 100% taxable.
So repaying the loan will still ultimately be to your long-term benefit, just in a different way. And unfortunately you are stuck this year. You should ask the plan administrator if there is any time limit to making loan repayments. You might consider temporarily stopping your pre-tax contributions and making after-tax loan payments instead, unless you would lose out on a match by doing that.
Then if you separate from service (quit, retire, get fired) you have a whole other group of options for your 401(k) money.
It can get complicated, and professional advice might be helpful going forward. Good luck.
