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1099R

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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1 Best answer

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drc845443
Employee Tax Expert

1099R

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.

https://www.finra.org/investors/learn-to-invest/types-investments/retirement/401k-investing/401k-loa...

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2 Replies

1099R

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. 

drc845443
Employee Tax Expert

1099R

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.

https://www.finra.org/investors/learn-to-invest/types-investments/retirement/401k-investing/401k-loa...

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
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