I took out a 401K loan to payoff other high interest debts (5 year pay back period). Since I am still approx 15-20 year from retirement I did not see this as wrong espeecially because at the that time my 401k was taking a beating. If I lost my job I had anticipated on defaulting on the loan. I have now had my pay cut 20% which is something I had NOT anticipated. Unfortunately making the mandatory payments on the 401K loan is now causing finacial hardship for me affecting my ability to make my mortage payement, car payment, food etc. I would prefer to default, and pay the penaltities and taxes. IS this an option?
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Defaulting on 401k laon while still employed
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 jmhlmh |
Defaulting on 401k laon while still employed |
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Posts: 1 (05/01/09 04:05:03) |
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fender5150 |
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Posts: 141 (05/18/09 13:00:34) Contributing Member |
Are you still contributing to the 401k? If so; It would be better to stop your 401k contributions than to default on your loan. The penalties and taxes are
significant:
-10% penalty. -Your marginal federal, state and city rates; which could be as high as 35%, 10% and 2.5% respectively (47.5% total. IE: The taxes on a default could be as high as 57.5%. If you live in Florida, the total taxes could be as low as 25%. This is just a gratuitous comment, but it may also be true (I hope not). With last year's market, the 401k loan could have been the best investment in your portfolio! At least your portfolio is earning the interest paid on the loan! |
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jmhlmh |
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Posts: 2 (05/27/09 13:55:49) |
Thanks for the comments. Yes, the interest % I am paying to myself helps.
However my concern is of the legality of my company telling me I can not default so long as I am employed. Do not get me wrong, I am glad to be employed, however, can they (my company) really deny me the default option or does Federal law deny this option?? After all, this is my money. As side note: When I called the Investment company that handles the 401K, at first they told me I could default, "others in my situation were", then I was put on hold while they investigated "other options". When they returned I was then told NO I can not default and I can only do what the company allows. This makes me suspicious. Who makes the rules/laws here???? My income is not high (and it is getting smaller) therefore taking the remaining balance as income and paying the tax penalty is not a show stopper. |
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