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I understand that me taking a 401k was not a good idea so please as much as I know people want to tell me that I already know. I made a mistake...and did take a 401k loan out of my current employer.

I have found a new job and plan to leave this current employer and am reading that when a 401k loan is not paid off right away (within like 60 days) you end up having to pay a 10% early withdrawal penalty and the amount taken will be reported on a 1099R (Taxable income). Basically I am screwed it looks like...(I know I should of never done this - but I did so I have to deal with it).

My question is since this new employer is using a different company for our 401k (I cannot remember the name) and I used to have Fidelity I had some questions. Can I call fidelity and ask if they could just auto deduct from my new paycheck or allow me to pay back my loan monthly and hold me to it until I paid it off to avoid these issues?

Is there anything else I can do to avoid this? Please note I did not take the money out to purchase a vehicle or for hardship...I took it out for other reasons that do not apply to these special cases. If I cannot get out of this in any way how do I pay the 10% penalty - will a bill be sent to me? For what its worth the loan was for 22k USD.

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    You didn't used to have Fidelity. Fidelity is where your 401K IS at. Your new company will open a new, second 401K for you. There may be options for rolling your first 401K into the new one. But you can keep that 401K at Fidelity forever. There may even be FDiC reasons for wanting to do that, – Harper Oct 22 '18 at 18:05
  • Also its not 10%. It's 10% Plus the normal federal and state income tax on the $22,000. That adds to the top of your tax bracket, so like 28% Federal 10% state or whatever. Yes, you could end up paying 48% of the money in additional tax. It also adds to your AGI so watch out for other effects. – Harper Oct 22 '18 at 18:07
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It's not 10%

What's happening is that the loan is only a loan until you quit and fail to pay it back. Then it's a withdrawal.

When you withdraw from a 401K, it counts as regular income and is taxed at the Federal, State and city level as regular income. (Not investment income). Further, if you are too young, you also pay a 10% excise tax.

These taxes stack, and they apply to the top of your tax bracket, say 28% Federal, 10% state and of course the 10% excise tax. Totaling 48% in that example. 48% of 22k is about $11,500.

So in that example it would be either pay the $11,500 or pay the $22,000 back. In the latter case you are paying yourself, and the money continues to work for you for your retirement. In the former you pay the IRS and the money is gone.

Your call. If I were you I would go "all in" to pay back the $22k.

  • Good answer - gathering my funds now to see how much I can pay off at once. Thank you. – Jonny1978 Oct 23 '18 at 15:07
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Here is the bright side: You understand your mistake and while it will cost you some money but it is not life changing money. You can recover.

The answer to your limited question is "No". Fidelity or any other 401K administrator will not pay off your loans for you, that will need to be done by yourself.

With the new tax law you have until the filing deadline of this year's taxes, so presumably you have until April 15th to pay off as much of this 22k as humanly possible. You might want to work with your former employer's 401K administrator to figure out the best way possible to pay off as much as you can.

  • How will my former employer's 401k adminstrator help in such a case. What pointers could she let me know? I understand fidelity will not pay off my loan - I was asking if I could pay monthly until it is complete? Sorry for the question and I know it was a stupid mistake. – Jonny1978 Oct 22 '18 at 17:46
  • They are the ones that originated the 401K loan and presumably manage it. – Pete B. Oct 22 '18 at 17:48
  • Pete let us say I paid of 10k of it. Will the 10% fee be on the remaining balance and the tax reporting would be on the remaining balance as well (12k)? – Jonny1978 Oct 22 '18 at 17:59
  • The former employer's 401k administrator is still the administrator of your 401K. Have you tried talking to them? – Harper Oct 22 '18 at 18:01
  • @Jonny1978: Taxes and penalty would be owed on what is remaining, so pay off what you can. – Pete B. Oct 22 '18 at 18:10
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The recent change to the tax code impacted the required payback time for loans after you change employers. From the USA News and World Report article, New 401(k) Loan Rules Make Borrowing Slightly Less Risky

Changing jobs makes the loan become due. If you leave your job voluntarily or through a layoff or the 401(k) plan ends, your 401(k) loan will become due sooner. The outstanding balance of the loan must be paid back by the due date of your federal income tax return, including extensions.

This should give you time to move the account to the new employer and get a new loan from them to pay back the old one.

And, if Congress really wanted to help the middle class people whose only source of long term cheap money might be such loans, they would add a bit of code that requires companies (Those managing 401(k) accounts) to transfer the account with the loan in place. Add a $100 fee for the effort, as most loans come with an origination fee.

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