I have $20K in loans (4 total loans) from my retirement plan. This is about $700 a month in payments auto-deducted from my check monthly. I want to increase my monthly take-home and I'm wondering if defaulting on one or two of these loans, as dishonorable as it may seem, could help me in the long run. I understand that the IRS will be notified and it will be added to my income at tax time. I'm also aware of the 10% penalty imposed.

If I were to default on 50%, my yearly income would increase by $10K for 2013, and I'd owe a penalty of $1000. I would get about $350 in monthly income back.

Is there any sense in this whatsoever?

Thanks.

I think your math is in error. If you default on $10K in 401(k) loans, that would reduce the amount you are paying to yourself in loan repayment by about $3000/year, not $10K/year. I'm assuming here that the terms of your 401(k) repayment is three years. Yes, the $10K gets added to your taxable income, plus the 10% penalty would be due, so you take quite a hit.

However the real question is: are you allowed to default? Since the money is withheld from your pay check you probably can't default unless you quit your job and no longer receive a pay check - is that what you're contemplating? I understand the desire to increase your cash flow, but please bear in mind that your loan payment is not going to some bank but rather is going into your own account - you are paying yourself, and it doesn't make sense to stop doing so.

Besides your faulty math, you have a faulty understanding. There is no way you can "default" on these loans. As part of your agreement in taking the loans, you agreed to payroll deductions for the payback. As ebaines noted, unless you quit your job, you will not be allowed to default.

If you need to increase your take home, then see if you can reduce your voluntary contribution towards the plan.