Is it possible to rollover my 401k with a loan to an IRA to avoid taxes and penalties?

I was recently laid off. I have a total of $88,137 in my 401k and loan balance of 16,669. I can't pay the loan back since I haven't had a job.

If I don't pay it back by September 30th, they will treat the 16,660 as a distribution. I want to avoid the penalties and paying taxes on this amount. I've had no luck getting a new job, and don't feel like it's my fault that I was unable to contribute to my loan once I was laid off 4 months ago.

Is it possible to rollover the entire amount of $88,137 to IRA to avoid paying taxes and penalties? Any help is greatly appreciated. I worked too hard to lose my money and it's not like I'm trying to withdraw it or avoid paying my loan.

Any chance I can get a break here? Once I get a job, I can continue paying off the loan. Any help ASAP or suggestions is greatly appreciated!

Asked by kimbababalooza 27 months ago Similar questions: rollover 401k loan IRA avoid taxes penalties Business > Taxes.

Similar questions: rollover 401k loan IRA avoid taxes penalties.

No you can not roll the 401k to an IRA to avoid the tax and penalty on the 401k loan This is one of the great pitfalls of taking a loan from a 401(k). The loan needs to be paid back in five years while you are working, or within 60 days if you are laid off or quit your job. kiplinger.com/features/archives/2008/10/... The IRS never designed 401(k)'s as revolving lines of credit.

But most people turn to the 401(k) in an emergency because it usually is the largest source of available funds. Others just take the loan because they have some major purchase they want to make and again the largest source of funds is the 401(k). But, the downside is the loan rule.

You borrowed money and still have a $16,669 balance. This money is no longer in your 401(k). So if you roll the $88,137 to an IRA, you still have a loan balance of $16,669 and unless you pay back the loan by 9/30, it will be considered a distribution subject to tax and penalty.

The tax and penalty are not due now. They are due when you do your taxes for 2009. At that time you will owe at least $1,669 (10% early withdrawal penalty) plus you will have $16,669 added to your total income for 2008.So what you need to do is take your last pay stub with the total you have earned for the year and add the $16,669 to that number to come up with total income for 2008.

Then check to see if you have had enough withheld to date or try to determine how much tax you have to pay. Since I don't know what your total income was so far for 2009, you need to see if the extra money has pushed you into a higher tax bracket. Here is a calculator to help you figure out what you will owe.

dinkytown.net/java/Tax1040.html It is for this reason I advise my clients to fully understand the pluses and minuses of a 401(k). The 401(k) is a good way to save for retirement, but you need to fully understand that putting the maximum in a retirement plan is not the best way to save. I recommend to my clients to put away 15% of gross income each year until you have 50% of one years income in safe savings vehicles like CD's money market accounts, saving accounts, etc. Once you have a 50% liquidity position, you move 7% of the 15% into the 401(k) and the remaining 8% into investment accounts as determined by your risk profile.

I recommend this for a number of reasons. Putting too much money in a 401k can cause a liquidity problem. All you have to do is look at the 401K questions here on Askville, and you will see most of them deal with how to get money out of a 401K.

That is because people followed the old saw about putting the maximum each year in a 401K, without any other savings. If you do this without the proper liquidity backup, getting money out of the plan in an emergency can be very difficult unless your plan allows loans. Some plans don’t.

And, then you have to worry about paying off the loan which is really pay back your own money with interest. While money going into a 401K is a pretax dollar, there is really no tax savings in the plan. There is a tax deferral.

A lot of financial advisors misuse the term "save on taxes," when they really mean defer taxes. For example, if you were to contribute $10,000 a year for the next 25 years at a 5% average rate of return you would have $501,135 in the account. In the 35% tax bracket you would save $175,397 in taxes.

But, if you took a lump sum (most people don’t, do it this way) but for this example you would owe $175,397 in taxes, exactly the same as what you saved, leaving a balance of $325,737. You can not access the tax savings. It is locked in the plan.

Another way to look at this is your current $10,000 is really only $6,500 if you are in the 35% tax bracket and $7,500 if you are in the 25% bracket.(I have not included the 10% penalty for early withdrawal if you are under 59 1/2) This is one of the biggest problems with 401K balance statements.It always shows the gross amount, not the net after tax. Money inside the 401K is taxed as ordinary income. For example, if you invest in equities inside a 401K, they are taxed as ordinary income, (as high as 35% under today's laws).

If they were outside the plan, they would be taxed at a capital gain rate ( currently a high of 15%). So when it comes time to make withdrawals, you will pay as much as 20% more in taxes inside the plan than outside. Investment losses are not tax deductible inside the plan.

They are outside the plan. So for example if you had lost a lot of money in the recent stock market drop, none of those losses would be tax deductible if the loss occurred inside the 401k. Investment choices are usually somewhat limited inside the plan.

Outside you can pick any investment you want. Plan fees can erode your account balance inside the plan. You should check with your plan administrator to see what the charges are.

Most are between 100 and 150 basis points. (1% to 1.5%) In the example above, your account would not have grown to $501,135, but $403,131 with a 150 basis point charge. These fees include plan administration fees, investment fees, individual service fees, sales charges, and management fees.

Most of these fees do not exist outside a 401k plan. There are some outside a plan, but they usually run between 20 and 50 basis points.(.20% to .5%) For example, Charles Schwab is waving all investment fees until June 30, 2010. http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20090625/REG/906259976/1094/INDaily01.This is a big difference as compared to a 401k.401k and IRA's don't give you freedom in retirement to choose the amount you want to take.

After 70 1/2 you must follow a government table an take what is called a Required Minimum Distribution. This means, based on your age, rate of return, and retirement balance, you must take at least the minimum. If your account is large (you have put in the maximum over the years,) your required withdrawal could put you in a higher tax bracket.

You should maintain control of your money during retirement. 401k"s do not give you that control. http://www.bankrate.com/finance/money-guides/ira-minimum-distributions-table.aspx and the government reserves the right to change the tables, increase your tax bracket, or just plain change the 401K rules.

Here is one idea you might try if you can get the money from someone. If a parent or someone could lend you the money, you could pay off the loan, roll the money to an IRA, and then once you go back to work, pay back the person at the same rate you made contributions to the 401(k). One the borrowed money was repaid you could then start putting money into the IRA.

I wish there was an easy way to avoid the tax and penalty, but that is one of the pitfalls of taking a loan from a 401(k) and then getting laid off. If you still have the paperwork from the loan, somewhere in the documentation are the rules regarding the loan and payoff requirements..

You need to ask them what your options are Given that many people are probably in the same situation, they may make a one time exception or waiver. It all depends on the company and how well they are doing, Fidelity, Vaguard, Principal, whomever. Don't ask, don't get, is the phrase as well-you have nothing to lose by asking them what your options are.

They should have assigned an associate to you when you got laid off. If not, then get one. The main penalty is actually the taxes for next year, but since you are saying you have not worked, this might not be the disaster it seems to be.

Find out what the penalties will be, but since you already paid a lump sum for the loan when you took it out, again, it might not be the disaster you think it sounds like. If you roll over, you might lose accessibility to the money and you might roll over into worse funds, which will take a bite out of the money even more. One other piece of advice, keep all receipts you have, especially for any medical expenses/health expenses because if they toal more than 7 1/2% of what you have earned this year, you can also get a break on your taxes, and take the maximum deductions allowed for things like office supplies and so on you would have had to use to try to look for a new job.

Also, think about what you borrowed the money for--is there any way to recoup even some of it quickly? Good luck! .

1 I recommend you go to E*trade. Com, and open a "401k rollover to IRA" Account. It is probable they can accept all of your funds intact, but if they can't the fund will have to be sold.

That will then mean you have investible cash in your account, and you will need to find a new investment for it. No taxes should be due on such a transaction. If you roll to a ROTH there will be income tax on the amount that was moved.

Avoid taking possession of the money yourself, and you should be headache free...

I recommend you go to E*trade. Com, and open a "401k rollover to IRA" Account. It is probable they can accept all of your funds intact, but if they can't the fund will have to be sold.

That will then mean you have investible cash in your account, and you will need to find a new investment for it. No taxes should be due on such a transaction. If you roll to a ROTH there will be income tax on the amount that was moved.

Avoid taking possession of the money yourself, and you should be headache free...

2 Did you miss he has an outstanding loan. You can roll the 401(k) into an IRA, but this does not satisfy the outstanding loan. Unless he pays back the loan and then rolls the money to a IRA, he still has $16,669 in his possession.

This will generate tax and penalty unless he pays the loan back by 9/30. There is no way to get around the loan.

Did you miss he has an outstanding loan. You can roll the 401(k) into an IRA, but this does not satisfy the outstanding loan. Unless he pays back the loan and then rolls the money to a IRA, he still has $16,669 in his possession.

This will generate tax and penalty unless he pays the loan back by 9/30. There is no way to get around the loan.

"The 'answer' being "Yes"...The way the Questioner wrote the Details I wasn't sure if the loan was from the 401k,or an additional item of interest to the Questioner... (I confess to being prejudiced against borrowing from 'retirement money' to live now, so I gave short shrift to the mention of the loan...)In the event it is money borrowed from the 401k the Questioner can easily extrapolate that if he doesn't pay that loan back he will, of course, owe taxes on it, from my comment: "Avoid taking possession of the money yourself, and you should be headache free..." .

"The 'answer' being "Yes"...The way the Questioner wrote the Details I wasn't sure if the loan was from the 401k,or an additional item of interest to the Questioner... (I confess to being prejudiced against borrowing from 'retirement money' to live now, so I gave short shrift to the mention of the loan...)In the event it is money borrowed from the 401k the Questioner can easily extrapolate that if he doesn't pay that loan back he will, of course, owe taxes on it, from my comment: "Avoid taking possession of the money yourself, and you should be headache free...

I cant really gove you an answer,but what I can give you is a way to a solution, that is you have to find the anglde that you relate to or peaks your interest. A good paper is one that people get drawn into because it reaches them ln some way.As for me WW11 to me, I think of the holocaust and the effect it had on the survivors, their families and those who stood by and did nothing until it was too late.