2018 New 401-K Loan Default Rules

Do you have an existing 401-K loan? Are you planning to change jobs in the future? Do you want to know the repayment tax rules regarding 401-K loans? If you answered yes to all these questions, then it’s important that you understand the new 2018 tax law regarding 401-K loan default rules.

Hello, this is Noel Dalmacio, your ultimate CPA at LowerMyTaxNow.

Here are three things you need to know about the new 401-K loans default rules:

  • Effective date– any 401-K loans after 12/31/17.
  • Previous tax law – you had 60 days to payback and roll over the 401-K loan to an IRA.
  • New 2018 tax law – you are given more time to roll over the loan balance to an IRA. The new law allows you to pay back your loan by the tax filing due date (April 15th) including extension date (October 15th) of the following year in order to avoid the loan being taxed as a distribution and possibly subject to the 10% early withdrawal penalty if you are under 59 ½ years old.

Example – On January 1, 2018, Dylan resigned from his job. At that time, he had an outstanding $50,000 401-K loan. He is under 59 ½ years old. Under the old tax rule, he must pay back and contribute $50,000 within 60 days to an IRA to avoid the loan being taxed as a distribution with a possible 10% early withdrawal penalty. Under the new tax law, Dylan has until April 15, 2019 (October 15, 2019, if he files an extension). That will give you as long as 21 ½ months from the date you separated from your employer to make the contribution and avoid recognizing the $50,000 as income with 10% penalty, if applicable.

To recap, make sure you remember these three things in case you separated from your employer and have an existing 401-K loan.

If you like to learn more, click the link lowermytaxnow.com and sign-in to receive my weekly blog.

Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com.

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Noel Dalmacio, CPA, CFP, MS TAX
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Irvine, CA 92606

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