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Question for the Money Doctors

Question submitted on Jan 11, 2011.

Question

Hello, I have approx. $200k in a 401(k) plus an outstanding loan of approx. $32k. Company has been acquired and I now have an option of rolling it all over to a IRA, but Vanguard is telling me that the loan will be looked at as a distribution, they will withold 20% and I may pay a 10% penalty next year when I do my taxes. Is there any other penalties or taxes I need to be concerned about? Also, I thought if the entire amount was rolled over to an IRA one did not have to pay taxes on the outstanding loan amount as long as the amount being rolled over was more than the loan, correct? Thank you.

Answer

You will need to pay off this $32K loan to avoid it being treated as a taxable distribution. Do you have the resources to do this?

Can you leave the 401(k) plan with the employer and continue to make the payments on the loan?

Will the new company take over the 401(k) and continue the loan?

If you rolled over your 401(k) into an IRA, the outstanding loan will be a taxable distribution with the required withholding. The required withholding may not be enough to cover the entire tax bill. You will also need to consider the state taxes and possible state penalties.

Talk to a CPA to review your options.


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