I am behind on my 401k loan. I am wondering if it will cost me the same in the long run to default and pay the penalty plus a 1099R than it will be to continue paying for the next 12 years including all of the accrued interest. I owe approximately $13,000.
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Hello, Unless the 401k plans are with a former employer, I do not know how you have managed to default on your 401k loans as the payments are usually deducted from your paycheck.
However, if you default on a 401k loan with a former employer, the 401k loan will be treated as a withdrawal. You will receive a Form 1099R from the plan, and will be required to pay taxes on the amount in the current year and possibly incur a 10% penalty on the early withdrawal from a 401k.
Here is a resource that you may find helpful.
That is a decision only you can make ... but here are the facts to consider :
> the amount of interest you are paying each year
> the federal taxes you will pay on the deemed distribution
> the 10% penalty you will need to pay
> the equity you would lose in the 401K and the earnings
Say you have a $20K loan that is only costing you 10% interest the loan will cost you about $2000 but you will have put the $20K back in the retirement account and it increased in value over the years so you will still have more than $20K in the end. But if you default on that same $20K it could cost you 20% or more in taxes/penalties which could be $4000 or more and you will have nothing in the 401K.
Hello, Unless the 401k plans are with a former employer, I do not know how you have managed to default on your 401k loans as the payments are usually deducted from your paycheck.
However, if you default on a 401k loan with a former employer, the 401k loan will be treated as a withdrawal. You will receive a Form 1099R from the plan, and will be required to pay taxes on the amount in the current year and possibly incur a 10% penalty on the early withdrawal from a 401k.
Here is a resource that you may find helpful.
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