You Will Leave the Company

Sandy works under a contract, and her contract is about to expire. She has a $5,400 401(k) loan, and it needs to be paid off in 60 days. Dave warns Sandy to pay off this loan as fast as possible.

QUESTION: Sandy in Oklahoma City works under a contract, and her contract is about to expire. She has a $5,400 401(k) loan, and it needs to be paid off in 60 days. She’s hoping her contract will be renewed, but she isn’t sure. Dave warns Sandy to pay off this loan as fast as possible even if she has to borrow the money.

ANSWER: I’d pile up cash like crazy, and then once you’ve gotten rehired either there or somewhere else, I’d pay that loan off.

You’ve got 60 days to pay it off from the time you leave the company. If you don’t pay it off during that time, then it’s going to be considered an early withdrawal and you’re going to get hit with taxes and penalties to the tune of about $2,000 to $3,000 in this situation. It’s going to be wise to borrow the money rather than get hit with 30% or 40% on this thing because you’ve already borrowed the money. We’re just getting a different loan to take it out.

Now, if you’ve got the money saved up and the contract gets renewed or you get a new job inside that 60 days, you write a check and pay the loan off. That’s a simple one then. And don’t ever do this again. Never borrow on a 401(k). Never, ever, ever borrow on a 401(k), and right there is the reason.

“Well, Dave, I’m not on a contract. I’m in a stable—” Well, I don’t care. You will leave the company—when you die, when you get a better job, or when they fire you. One of the three—you’re going to leave the company. When you leave, your 401(k) loan is due in full. If you do not pay it within 60 days, boom! You get smacked with a 10% penalty plus your tax rate—40% in most cases. Half of the dad-gum money, people! Don’t set yourself up for that.

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