My wife is leaving her job, and currently has a $5000 outstanding 401k loan. She is going to cash out her pension and pay the 20% tax and open a Roth IRA. I also currently have a 401k loan that is about $2000. Would it be smart to pay off my loan with part of her retirement pension and get another 401k loan to pay off her loan so we are not hit with the 20% tax and 10% penalty fee, as well as any taxes that will need to be paid to our state?

It seems like borrowing $2000 from the payout and opening a ROTH IRA with the rest would less of an impact. I am not worried about having a 401k loan, as I am not leaving my job and I am very stable.

Thanks for any help or advice

Take the loan to pay off her 401K loan.

Then, when she leaves her job, have her roll the 401K into a rolleover IRA with the brokerage house or mutual fund or bank of her choice. My personal preference is Charles Schwab.

Once the rollover is done, then she can convert the rollover IRA to a Roth IRA.

By doing what I have described above, she avoids any Early Withdrawal Penalty and will only pay normal income taxes on the Roth Conversion.

I'm missing something - why bother closing out your $2K loan only to borrow $5K? Also - be careful of timing - check with the plan administrator on the exact rules but I believe she must pay off the $2K outstanding loan within 60 days of leaving her job to avoid having it reclassified as an early distribution (which would trigger the taxes and penalty). So if she is using her pension money to pay off your loan, and then you take another 401(k) loan to pay off her $5K loan, the timing may be tight. I would suggest that you take your $5K loan and pay of her loan before she leaves her company.