I defaulted on a 401k Loan and the investment company sent me a 1099R Form. The total amount of the loan was $6500 and the Gross Distribution amount on the 1099 form is $4942.51. How much taxes would I have to pay on this and would there be a 10% penalty on the $6500? Also note this 401k was from a company that was purchased by another and they would not allow us to roll over the amount from the existing 401k. We had to pay the loans back on our own, so they were no longer being auto deducted from our paycheck. It just got away from me. Please advise on what type of penalty I am facing because of this. Thank you.

The owe a penalty of10% on the $6,500 (assuming you don't qualify for an early withdrawal without penalty), plus ordinary income tax on the $6,500. Seems they have already withheld 20% for the feds plus some portion for your state?

I think ebaines misread your post. As I read it, you borrowed $6500 and paid back a little more than $1500. So the balance was $4942.51 when you defaulted. That's what the 1099 is for. Since this was a defaulted loan balance nothing was withheld so you will have to pay whatever the amount will be. You will have to pay 10% as the penalty. The $5K will be added to your taxable income and taxed at whatever rate bracket that puts you into.

Lets say you are in a 25% bracket that would mean 25% of the $5K plus another $500 for the penalty.

I think ebaines misread your post. As I read it, you borrowed $6500 and paid back a little more than $1500. So the balance was $4942.51 when you defaulted. That's what the 1099 is for. Since this was a defaulted loan balance nothing was withheld so you will have to pay whatever the amount will be. You will have to pay 10% as the penalty. the $5K will be added to your taxable income and taxed at whatever rate bracket that puts you into.

Lets say you are in a 25% bracket that would mean 25% of the $5K plus another $500 for the penalty.


THANK YOU! This is very helpful.
So do I still need to continue paying the $5k amount back into my 401k? Or since it is now claimed as ordinary income, the loan is considered closed at this time? Thanks in advance for your time.

The owe a penalty of10% on the $6,500 (assuming you don't qualify for an early withdrawal without penalty), plus ordinary income tax on the $6,500. Seems they have already witheld 20% for the feds plus some portion for your state?

Thank you. I appreciate your response. ScottGem's answer was sufficient for my situation.

No, you do not need to pay it back since its been converted to an inservice withdrawal.

No, you do not need to pay it back since its been converted to an inservice withdrawal.


Thanks again, ScottGem. I truly appreciate your help!