[baovle]

My wife (36 years old) worked for State Street Bank in Massachusetts for six 6 years and qualified for Pension benefits. In 2006, she borrowed $7000 against her 401k in State Street Bank to remodel the home. She left SSB in the summer of 2006 for another job. In February 2007, she asked for a $9500 lump-sum distribution of the Pension from SSB and then paid off the loan ($6000 remaining) she had against her 401k.

My question is: Would she incur an early distribution penalty and how much tax she has to pay considering she paid back most of the pension money to the 401k loan?

Thanks,
Bao

[MukatA]

Yes, she would incur early withdrawal penalty of 10% of $9500. Also this money will be taxed as her regular income.

[baovle]

Can we consider $6000 she paid back into her 401k loan a direct rollover to an IRA, and she can only be taxed and penalized on the remaining $3500?

[MukatA]

She borrowed from 401K and paid back, no implication.

She withdrew from 401K with out any qualifying reason, it is subject to Early withdrawal penalty.