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Asked 7/27/2010

I took out a 401k loan default?

I took out a 401k loan at my company and paid on it for a couple of years. I found a new job and they told me that unless i could pay it all off in 1 lump sum i had to default. I paid the penalties and the taxes for defaulting my loan and worked for the other company for close to a year. My former employer contacted me with a very generous offer to return so i did. Now I'm back with my original employer and the loan still shows up on my retirement page. The retirement people say i have to repay the original loan because its in default but i'm no longer eligible for payroll deductions and would have to pay it back in after tax money. I feel after i paid the penalties and was Heavily taxed on the default it should be gone. I don't want to pay double taxes on this but i also don't want my retirement held hostage over a $5k old loan. What are my opitions? BTW they said it would have been gone had I rolled my 401k into the new companies retirement then rolled back when i returned.

 
 
 
 
 
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Answer 1/1 - Submitted 7/27/2010

Annoyingly, the plan people are probably correct -- if you had pulled the money out when you left the company, either into another 401(k) or into an IRA, the loan history would have disappeared.

Since you already paid tax on this distribution, if you do pay it back in, you will have a "basis" (after-tax money) that you will not pay tax on when you draw the money out in the future. That's a small benefit, I know.

Instead of paying into the 401(k), if you have the fiscal discipline to do it, you could most likely contribute to an IRA. Sort of spreading the risk around, so all your retirement isn't with one company. You would want to talk to someone who can look at your tax return and make sure you're eligible.

 
 
 
 
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