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Asked 8/9/2011

Company stopping 401K program, but I have a 401K loan

The company I work for is looking into firing the company that handles our 401K and instead having everyone roll their 401K money into self-managed stocks. However, I have an outstanding 401K loan that I'm only 12 months into paying. How is the company's decision going to affect me? Currently my 401K balance is $5,500 more than the principal amount of my loan

 
 
 
 
 
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Answer 1/1 - Submitted 8/9/2011

I'm not certain what you mean by self managed stocks but this could mean that the plan is going from a set of plan investments to self directed accounts or it could mean that they are terminating the plan and facilitating distributions by the participants to another account that is no longer part of the plan.

If it is self directed accounts you should be able to pay your loan down as the plan would still exist. Talk to your employer or record keeper to make sure this is true.

If it is a plan termination and distribution situation you have two options. First, you can pay the loan back before distribution or rollover to avoid taxes. Second, you can not pay the loan back which will result in a tax form being sent to you for inclusion in your next tax return. In that case you will pay a 10% penalty on the outstanding loan amount and applicable taxes at your tax rate. Which option you choose likely depends on your ability to pay back the loan now.

 
 
 
 
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