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If I'm terminated with an outstanding 'loan' on my 401 (k), is the loan balance paid off first or does it become income?

Tulsa, OK |

I recently terminated employment. I have a 401(k) and a loan on that 401 (k). If I choose to get a lump sum distribution to my personal bank account, will the balance of the loan be taken out before the money is distributed to me, or does the entire amount of my 401 (k) go into my bank account (after penalty and taxes) and the loan become taxable income?

Attorney Answers 1


The loan will be treated as a taxable distribution. The plan will add together the amount distributed plus the outstanding loan balance to determine the total value of the taxable distribution. It will then withhold 20% for federal taxes, plus any mandatory or optional state taxes, and distribute the rest to you. You will be responsible for any additional taxes owed at tax time next year plus a 10% early withdrawal penalty may apply.

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