Options for old 401k with outstanding loan

[magdavamos]

I have a 401k account with an outstanding loan, from a former employer. This 401k is still within the 60 days rollover period. I also have another Roth IRA account. If I rollover the money from the Roth IRA to a regular IRA, would that help me to avoid any penalties cause by the defaulted loan? If, not what could help me lower the damage.

[PaulaM · Accepted solution]

If you have enough Roth IRA contributions, you could take a distribution from it and roll the 401k into a traditional IRA (TIRA) with the funds from the Roth IRA. Any amount of the loan that is not repaid (rolled into an TIRA) will be taxed at your ordinary income tax rate. If you are under 55, an additional 10% early 401k distribution penalty would apply.

I would explore every opportunity to replace the entire loan amount if it were me. Friends, family, a personal loan with a lower rate than your tax rate (and penalty if applicable), credit card balance transfers that let you pay cash to yourself (not a cash advance) for a low fee,etc

Note: Don't take Roth distributions of the earnings if the Roth is less than 5 yrs old or you are under 59.5. That leads to more penalties. See the Schwab link below for when earnings and penalties apply.

https://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/roth_ira/w...