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    MacTech's Avatar
    MacTech Posts: 1, Reputation: 1
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    #1

    Nov 15, 2006, 07:45 AM
    401k home loan default
    My wife took out a loan two years ago from her 401k. This was a first time withdrawal for the purpose of a home loan.

    She is now interviewing with another company. (Better commute, new faces)

    Given that her loan becomes callable when she leaves, if she defaults, is there the 10% withdrawal penalty —since it was used for the first time home purchase— or is there merely the remaining balance of the loan added to her income and calculated in the normal tax manner?
    ScottGem's Avatar
    ScottGem Posts: 64,966, Reputation: 6056
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    #2

    Nov 15, 2006, 07:47 AM
    It was a loan, not a withdrawal. Most likely it will be subject to the penalties and taxes. What I would recommend is that you get a home equity loan or some how pay off the 401K loan before distribution. Then roll over her plan into the new company and take out a new 401K loan to pay off the home equity loan.
    AtlantaTaxExpert's Avatar
    AtlantaTaxExpert Posts: 21,836, Reputation: 846
    Senior Tax Expert
    		  
    #3

    Nov 15, 2006, 06:16 PM
    It is Definitely subject to the penalties.

    Definitely pay off the loan, then take out a new loan!
    Fr_Chuck's Avatar
    Fr_Chuck Posts: 81,301, Reputation: 7692
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    #4

    Nov 15, 2006, 06:30 PM
    I will tell you how my 401K works, if I have a loan out when I leave employment, the amount becomes payable at once. If I can't pay it, they will show it as a withdrawal from my 401 instead of a loan ( they explain it as paying off the loan but they still show it with penalties and taxes.
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