401k Rollover Options – What to Do if You Have an Existing 401k Loan

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Taking a loan from your 401k plan can be a major help if you run into unexpected expenses or find yourself in a financial bind.  However, after the loan has been made, you may run into some interesting challenges that arise if you decide that you want to perform a 401k rollover.  Fortunately, there are few things that you can do to help navigate these rather complex financial waters.

When you take money from your 401k and are still employed by the company with whom you have the 401k plan, you can pay back the loan over time by electing to have a small amount taken out of your paycheck each week.  This, of course, is the best way to pay the loan back and maintain the tax-deferred status of your remaining funds.  Ideally, by the time you’re ready to leave the job; you’ll have paid back the loan and will be able to do a 401k rollover without any complications.

However, the situation changes dramatically when you change jobs.  Under the rules of most 401k accounts, you’ll have a short time – usually only 60 days – to pay back the money that remains outstanding on your loan.  Paying back the loan before you attempt the rollover is usually the best option because otherwise, the money you took out will be treated as a distribution, which could open you up to unnecessary taxes and penalties.

If you attempt to initiate the 401k rollover before paying back the entirety of the loan, the money you received as a loan will be subject to taxes.  In addition, if you’re under the magic retirement age of 59 ½ years old, you may be required to pay additional early withdrawal penalties.  Usually, your loan will be taxed as income, plus 10%.  As an example, let’s say that you took out a loan of $4,000 from your 401k account and your current tax bracket is 25%.  If you attempt a 401k rollover before the loan is paid off, you’ll pay as much as $1,400 in penalties and taxes!

In most cases, what will likely happen is that the financial institution that made the loan to you would hold about 20% of the amount of your 401k account balance and the remainder you owe would come due at tax time, as the 401k plan distribution will be treated as income on your tax return.  Keep in mind that this additional income may push you into a higher tax bracket, causing you to owe even more come April 15th.

Of course, the simplest way to avoid all of this is to pay the 401k loan back before ever attempting a 401k rollover.  With the money safely back in the account, all of these consequences are wiped off the board, and you can treat the rollover just as you would any other transfer.

In fact, the complexity of this issue is one reason why some 401k plans don’t allow loans to their participants.  Some larger businesses enjoy offering this service to their employees, but it’s clear that the headaches that come when an employee takes money from the 401k and then the leaves the business aren’t worth it in most cases.

The Best 401k Rollover Options for the Self Employed

If you’ve recently left a job that offered a 401k rollover plan to be self-employed, you may be wondering what the best 401k rollover options are for someone in your situation. The first thing that you might want to do is to leave the 401k funds where they are, and this is an option, depending on the structure of your former employer’s rollover plan. Continue reading

How to Avoid Tax Penalties with Different 401K Rollover Options

The best way to avoid tax penalties with different 401k rollover options is to understand how these different rollover options work and which one is most likely to create a tax burden for you.  It’s also important to understand what these options are called and to ask for what you want by name when you request a rollover plan. As always, any 401k taxes or penalties on your money are your responsibility.

Two Types of 401k Rollover Options

Indirect Rollovers

The two main types of 401k rollover options are direct and indirect. In an indirect rollover, you request the money from your old 401k plan, receive a check from your former account provider and invest it yourself in another retirement account, such as an IRA. Continue reading

401k Rollover Options – Avoid Cash Distributions!

If your employer offers a retirement plan as part of their benefits package, this will be the basis for your 401k rollover options. However, if your new employer offers a Simple IRA instead of a 401k rollover plan, your transfer options will be more limited. Continue reading