| Leaving your job? Here are options for handling that unpaid 401(k) loan | | |  | WED, JUN 08, 2022 | | | | Do you know what happens if you have a 401(k) loan and quit your job?
If the answer is "no," it behooves you to have a clear understanding of all the available options before you actually give notice and start that new job.
If you leave your job (whether voluntarily or involuntarily) with an unpaid loan balance, your employer may allow you a period of time to pay off the loan in installments.
Typically, If you have a 401(k) loan and lose or leave your job, you're supposed to pay back the loan within a short time period or you will have to take that as a disbursement, which means you'll get a 10% penalty and pay income taxes on the funds.
So, basically, if you can't or don't repay, the plan will reduce your vested account balance in order to recoup the unpaid amount. This is called a loan offset. That's considered the distribution subject to ordinary income taxes and potentially the 10% early-withdrawal penalty.
Just to be clear: Regardless of how long you have left on a 401(k) loan, the IRS requires 401(k) loans to be repaid by the tax due date for federal tax returns, including any extensions.
It's also important to keep in mind that while you may actually be permitted to continue paying off the loan in installments, most companies expect immediate repayment when you leave.
You may be wondering: Can a 401(k) loan be transferred to another company?
Normally, a 401(k) loan cannot be transferred to another retirement account. If a plan allows partial rollovers, you may be able to rollover the 401(k) balance minus any outstanding 401(k) loan balance.
If it makes you feel any better, you would not be alone when it comes to finding a new job and carrying a 401(k) loan. To that point: Last year, roughly 13% of 401(k) participants had a loan outstanding, according to a recent study by Vanguard.
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