OK, let’s say I were to apply for a $1,000 dollar loan from my 401(k) account, then switched jobs or quit or whatever. According to the Transamerica site, it says " If you terminate employment, plans usually require that you pay back any outstanding loans in full. Otherwise, it will be considered a taxable distribution from the plan and will be reported to the Internal Revenue Service (IRS)." But $1,000 isn’t a whole heap of money; wouldn’t it have minimal impact on my taxes, and therefore be the most desirable consequence?
(Edit: I know it would be more desirable to repay the loan entirely in the long term; I’m just wondering about immediate impact, for example, if there was a hardship I needed the money for which didn’t fall under the rules for a hardship withdrawal and didn’t have the means to pay it back immediately on changing jobs. Also, this is not a situation currently affecting me, just wondering what I would do if something DID happen like this.)
An early distribution carries a 10% penalty. So you’ll pay ordinary income tax on the $1000, which may be $200 or $250 depending on your marginal tax bracket, and also pay a penalty of 10% or $100.
If withdrawing $1000 from your retirement savings and immediately giving 1/3rd of it to Uncle Sam sounds like “the most desirable consequence” … well I don’t quite know what to say.
It’s not quite as bad a deal as borrowing $1000 from a payday loan shark, but it’s close. You’d do far better to not borrow the 401K money in the first place, or failing that, to replace the 401K money by borrowing from someplace else if you have to change jobs before you’d normally have repaid the loan.
In addition to what LSLGuy said, when you are paying back a loan from your 401K, that money is not earning interest (except what the loan on the 401K charges).
It is true that $1,000 is not a ton of money, and therefor the penalties would not be incredibly large, but by the same token, $1,000 is not a large amount of money, therefore there are a lot of ways to raise it that would be preferable to borrowing from your 401K.
OK, thanks for the info!