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I lost my job in June 2023 and I had 2 outstanding 401K loans. Unfortunately I could not secure a job until 2 months later and had to use severance to pay bills instead of paying these loans back. Looking at my overall tax burden for 2023 the 401k loans $33.5K will be ordinary income and my overall income will be over 190,750 with standard deductions which is the 22 to 24% tax liability line. I am receiving a bonus from the company i left of approximately $4K by my calculations it would be less taxes paid if I paid back the smaller loan 0f $6800 than putting it in a tradition IRA that my wife and I have. If I pay the loan back the tax burden goes from $8110 to $6581. However if I max the IRA the tax burden is $7010. I would think it should be the same. I would be under the 190,750 after either scenario however the calculation is $10,294 plus 22% of the amount over $89,450 to 190,750. My question is does this make sense to payoff the loan to decrease my tax burden rather than the IRA? Just want some confirmation I am making the right decision. If there is another scenario that I am missing please advise.

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  • I'm not sure I understand what you mean by IRA. Are you considering rolling the loan over to IRA, or are you discussing a separate IRA contribution?
    – littleadv
    Dec 10, 2023 at 17:55
  • Do I payoff the loan or do I put the money in the existing IRA? My calculations say pay off the loan. Looking for confirmation of which way to go with the money I have. It's either one or the other. Not a rollover just trying to reduce tax burden.
    – Vince D.
    Dec 10, 2023 at 18:07
  • @VinceD. Your income exceeds the limit to deduct your traditional IRA contributions since you were covered by a 401k in 2023, so you won't get a tax benefit from making a non-deductible traditional IRA contribution.
    – Stan H
    Dec 10, 2023 at 21:23
  • Pay off the loan. See other answers for why borrowing from the 401k should be a near-last-resort.
    – keshlam
    Dec 10, 2023 at 21:35
  • Thanks all I feel better about paying off the loan.
    – Vince D.
    Dec 12, 2023 at 0:01

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