I have approximately $35K in loans. Leaving me a $75K balance. My annual salary is $75K. If I take the $75K out and use it to pay the $35K, how will I be taxed? I live in IL. Any help would be greatly appreciated.

That won't work. And its extremely foolish. If you cash out your account, you will pay a 10% penalty on the WHOLE balance ($110K). In addition, that $110K will be added to your taxable income. Since the interest on the 401K loans goes back to you, you would be losing a significant amount of money to pay off the loans.

Scott,

Thanks for the quick response. It may seem foolish but I need to leave my job and want to tie up all lose ends. Any better suggestions?

Thanks

One other thing, I will not be seeking new employment, so I will not have any income to pay off the loans.

Yes, I'm actually in a similar situation. I am leaving my company have about $3500 in loans balances. My plan is to take a short term loan (probably from a HELOC) to pay off the balance within the time frame. When I get a new job, I'll rollover the account into my new plan and take a new loan. I've done this with 2 previous job changes.

One other thing, I will not be seeking new employment, so I will not have any income to pay off the loans.

Are you of retirement age?

If there is no way for you to pay the loan balances, then let them convert the loans to an inservice withdrawal and just take the penalties on that.

But I won't have any income coming in to payback any type of loan, HELOC or 401K. I appreciate your responses and wish you good luck, with the loan payment and in seeking new employment.:)

Unfortunately, I am not of retirement age.

I'm curious, why won't you be seeking new employment?

Will be staying home to care for an ailing parent. :(

Well, I would then leave the balance and just take the penalty on the loan balance. Since you probably won't get the notice until next year, you will have little income to tax.

Answered via email