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Frequently Asked Question

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.

This is for educational purposes only. The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.


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