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Do I have to repay my 401 (k) loan?

By on March 23, 2021 0

Illustration by Martin Gee

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If you have a 401 (k) loan but your employer hasn’t reopened, you’re probably still obligated to repay the loan, says Virgil Rutili, a certified financial planner in Chicago.

“I guess if the employer doesn’t reopen, it doesn’t change the fact that you still have the loan,” said Rutili, founder of Focused wealth management. “I don’t think there is a loan forgiveness.”

Not all companies allow employees to borrow on their 401 (k) plans, and financial advisers say that’s usually not a good idea. Yes, borrowers pay each other interest on loans, but they lose the benefit of saving and growing untaxed money. In addition, the borrower ends up repaying the loan money tax free with after tax money. (If you borrow $ 100 tax-free, depending on your tax bracket, you’ll need $ 125 or more of taxable income to pay it off, plus interest.)

Emily allen, a certified financial planner at Strategic wealth of Buckingham in Houston, says the Coronavirus Aid, Relief and Economic Security Act passed by Congress in March changed some of the 401 (k) borrowing rules to help people during the pandemic.

The law on care increased the amount employees can borrow from $ 50,000 to $ 100,000, or all of the 401 (k) that vest, whichever is less. This will be in effect until September 23.

Employees can get a one-year extension to repay loans due between March 27, 2020 and December 31, 2020, although interest will continue to accrue. This applies to current employees, employees who have been placed on leave, and employees who have taken time off.

Rutili says employees who have borrowed from their 401 (k) and are fired, resigned or fired will see the money treated as a payout, in most cases.

The Cares Act waives the additional 10% penalty for people under the age of 59 and a half who take up to $ 100,000 on their 401 (k).

Employees who wish to obtain an extension of their loan or withdraw money without additional penalty must be financially affected by the pandemic, unable to work due to childcare needs caused by the pandemic, have been diagnosed with Covid -19 or have a dependent spouse diagnosed with Covid-19.

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