Q: I took out a loan against my 401(k) retirement account. Now I've been laid off. If I default on the loan, will it affect my credit score? I know that I will pay a 10% penalty and will have to declare the loan as income on my tax return.
Employers do not report defaults to the credit bureaus, so your credit score will not be affected. Instead, the loan becomes a tax liability. "It is deemed a distribution from the plan," explains David Wray, president of the Profit Sharing/401(k) Council of America, which represents companies that sponsor profit-sharing plans.
If you leave your job for any reason, your 401(k) loan is usually due in full within 60 days. If you can't repay it, you will receive a Form 1099 (and the IRS will receive a copy) that shows the amount on which you owe taxes. You have until April 15 of the following year to pay the tax. Employees 55 and older who take a 401(k) distribution because they have lost their job do not owe the 10% early-withdrawal penalty.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Wray cautions workers who are considering taking a 401(k) loan to be aware that should they default, 40% or more of the money could go to the government, assuming 25% in federal taxes and 5% in state taxes, plus the 10% early-withdrawal penalty. So you might net only $4,500 from a typical $7,500 loan.
-
This Stock Market Risk Could Shrink Your Retirement Nest EggThis little-known risk of a down market can cause lasting damage to your portfolio.
-
How Building Liquidity Into Your Retirement Plan Can Pay OffTo succeed in investing for retirement, you need time and discipline — liquidity can give you both.
-
U.S. Treasury to Eliminate Paper Checks: What It Means for Tax Refunds, Social SecurityTreasury President Trump signed an executive order forcing the federal government to phase out paper check disbursements by the fall.
-
457 Plan Contribution Limits for 2025Retirement plans There are higher 457 plan contribution limits for state and local government workers in 2025. That's good news for state and local government employees
-
Medicare Basics: 11 Things You Need to KnowMedicare There's Medicare Part A, Part B, Part D, Medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare — and much more.
-
The Seven Worst Assets to Leave Your Kids or Grandkidsinheritance Leaving these assets to your loved ones may be more trouble than it’s worth. Here's how to avoid adding to their grief after you're gone.
-
SEP IRA Contribution Limits for 2025SEP IRA A good option for small business owners, SEP IRAs allow individual annual contributions of as much as $69,000 in 2024 and $70,000 in 2025..
-
Roth IRA Contribution Limits for 2025Roth IRAs Roth IRA contribution limits have gone up. Here's what you need to know.
-
SIMPLE IRA Contribution Limits for 2025simple IRA The SIMPLE IRA contribution limit increased by $500 for 2025. Workers at small businesses can contribute up to $16,500 or $20,000 if 50 or over and $21,750 if 60-63.
-
457 Contribution Limits for 2024
retirement plans State and local government workers can contribute more to their 457 plans in 2024 than in 2023.
