How does taking a 401k loan affect taxes?

August 09, 2019 by Selena Quintanilla
401k nest egg

So, Selena... 

I took a small loan from my 401(k) last year to pay off some debts and get ahead on bills. It seemed like the best option at the time, but now I'm starting to worry about how this will affect my taxes. I'm beginning to think this wasn't the best idea. 

What are the tax implications of taking a 401(k) loan? 

-Lawrence 
 

So, Lawrence... The good news is that a 401(k) loan works like most other loans and is less impactful than taking an early withdrawal from your account. Regarding how the loan will affect your taxes, the short answer is that it won't. 401(k) loans are not reported on your federal tax return unless you default on your loan, at which point it will become a “distribution” and be subject to the rules of early withdrawal.

Distributions taken from your 401(k) before age 59 1/2 are taxed as ordinary income and subject to a 10% penalty for early withdrawal. There are some exceptions to this rule like using the money for medical expenses exceeding 10% of your AGI, separating from your employer at age 55 or older, or becoming permanently disabled.

While less stringent than an early withdrawal, 401(k) loans usually come with a variety of fees. Most loans asses a one-time origination fee, in addition to other maintenance and administrative fees. Failure to repay loans within five years can trigger the income tax and early withdrawal penalty referenced above. Something else to consider is that if you leave your job before the loan is repaid, it becomes due sooner. You should review the details of your loan agreement or fee disclosure statement for the terms specific to your situation.

Opting to take out a loan, 401(k) or otherwise, is hardly an easy decision. If you are feeling bad about your situation, cut yourself some slack and remember that while you pay the loan off, you can begin making better decisions toward a more financially secure future.

Tags: 401(k), loan

Recent Articles

Tax Deduction written on a sticky-note
Tax deductions and credits serve the same purpose − to reduce the amount of a taxpayer's tax owed. The way that each serves this purpose is different.
speedometer
In 2019 self-employed taxpayers can deduct their car expenses at the standard rate of 54.5 cents per mile driven for business. However, most employees cannot.
Tax Debt Relief
Millions of individuals and business owners in America currently have unpaid IRS tax liabilities. Here are a few items to consider for tax debt relief options.
Tax Refund Check and 1040
You can call the IRS to see if your refund has been flagged for garnishment. Then you can reach out to set up a payment plan − if warranted.

SEARCH

 

Selena Quintanilla, CTEC
Communications Associate

 

Selena Quintanilla is a Communications Associate at TaxAudit, and a California Tax Education Council (CTEC) registered tax professional. She is now on a mission to bring clarity and comprehensibility to a topic that keeps us all up at night at least once a year-TAXES! Please, send coffee! 


 

Recent Articles

Tax Deduction written on a sticky-note
Tax deductions and credits serve the same purpose − to reduce the amount of a taxpayer's tax owed. The way that each serves this purpose is different.
speedometer
In 2019 self-employed taxpayers can deduct their car expenses at the standard rate of 54.5 cents per mile driven for business. However, most employees cannot.
Tax Debt Relief
Millions of individuals and business owners in America currently have unpaid IRS tax liabilities. Here are a few items to consider for tax debt relief options.
Tax Refund Check and 1040
You can call the IRS to see if your refund has been flagged for garnishment. Then you can reach out to set up a payment plan − if warranted.
This blog does not provide legal, financial, accounting, or tax advice. The content on this blog is “as is” and carries no warranties. TaxAudit does not warrant or guarantee the accuracy, reliability, and completeness of the content of this blog. Content may become out of date as tax laws change. TaxAudit may, but has no obligation to monitor or respond to comments.