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LEARN MORE ABOUT: 401k Plans
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A 401(k) is a retirement saving plan that enables employees to deduct a portion of their salary from their paycheck before taxes and invest it in a variety of funds. Many 401(k) plans allow employees to take out a loan against their account balance to pay for major expenses such as buying a house, paying for college tuition or medical bills. However, if an employee leaves the company or their plan is terminated, they must repay the loan balance or face a penalty.
One question that many 401(k) participants have is whether they can roll over a 401(k) loan to a new plan if they switch employers. Unfortunately, the answer is no. 401(k) loans cannot be transferred from one plan to another.
When an employee takes out a 401(k) loan, they must repay it with interest within a certain timeframe, usually five years. If the employee leaves the company before the loan is repaid, the employer will require the employee to repay the entire outstanding balance by a deadline typically within 60 days. If the employee fails to repay the loan or roll it over to another 401(k) plan, the loan will be considered a distribution or withdrawal from the account, which will be subject to taxes and penalties.
Moreover, rolling over a 401(k) loan between employers is not considered a qualified rollover, which means it does not meet the requirements for tax-free treatment. In other words, if an employee withdraws money from one 401(k) to repay a 401(k) loan and deposit it into a new 401(k) within 60 days, it will be considered a taxable and ineligible rollover.
Therefore, it’s crucial for employees to consider the impact of a 401(k) loan before taking one out. They should also be mindful of the terms of outstanding loans when they leave their company and explore all options for repaying or transferring the loan balance.
In conclusion, 401(k) loans are not transferable between employers’ plans, and any unpaid balance must be repaid within 60 days or face tax and penalty consequences. It’s important for employees to be aware of their options regarding outstanding loans when they leave an employer and plan accordingly to avoid serious financial implications.
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