FAQ - ANSWER

My understanding is that if I am over age 55 and default on a loan through my 401k when leaving the company, the 10% penalty is forgiven. Can you confirm that for me?

Answer:

If you default on a loan from your 401k, you are considered to have received a distribution from your 401k. Whether or not you will have to pay the 10 percent additional tax on early distributions from 401 (K) plan depends on a number of factors, including your age.

In order to avoid the 10 percent additional tax on early distributions from qualified retirement plans, the following all must be true:

• you received the distribution after you left the company
• you left the company during or after the calendar year in which you reached age 55
• your departure from the company qualifies as a separation from service or, you must meet one of the other exceptions shown in IRS Publication 560, Retirement Plans for Small Business and IRS Publication 575, Pension and Annuity Income.