Job Change and a Retirement Loan

Angel has a 401(k) at his current job, but he wants to take another job. The problem is he has a $6,000 loan against his 401(k). Once he quits this job, what happens to the loan?

QUESTION: Angel in Los Angeles has a 401(k) at his current job, but he wants to take another job. The problem is he has a $6,000 loan against his 401(k). Once he quits this job, what happens to the loan?

ANSWER: I would use your $10,000 savings to pay off this loan. Then I would roll your 401(k) to an IRA when you leave the job.

Here’s the problem, Angel: When you leave, if you do not pay off the loan—you have 60 days to repay the loan—then the IRS considers it an early withdrawal, and they will charge you your tax rate plus a 10% penalty. With your wife working, you’re in a 35% tax bracket, so this is going to cost you like 40% or 45%. That’s, like, bad. In other words, they’re going to take—they’re going to charge you like $3,000—the government is—if you don’t do this.

I’m going to use $6,000 and pay this loan off and then roll the 401(k) now that it’s back complete to an IRA as you leave your job. And then I want you to rebuild your emergency fund as fast as possible.

I would get moved first. You’ve got 60 days to do it. But what I would do is get moved and get settled and then hopefully you’ve got $6,000 left then, and I want you to write a check and pay that loan off sometime in the next 60 days. Then roll it from your 401(k) to an IRA. If you need help doing that, you can go to our Endorsed Local Provider (ELP) on our website, and they’ll help you figure out how to do that. It’s really not that hard, but you need to do it right to keep from having any taxes. What I’m trying to do here is avoid the government taking half your dad-gum money because you work too hard for it.

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