Question: I heard that the new tax law changed the amount of time I have after leaving my job to pay back a 401(k) loan. What are the rules now for borrowing from your 401(k)?
Answer: The new tax law changed the deadline for repayment after you leave your job starting in 2018. In the past, you generally had only 60 days to repay the loan or else you’d have to pay income taxes on the money as if it was a withdrawal (and a 10% early-withdrawal penalty if you left your job before age 55).
But under the Tax Cuts and Jobs Act, you don’t have to pay taxes or the penalty if you repay the loan by the due date of your tax return for the year when you leave your job (including extensions). For example, if you leave your job in 2019, you’d have until April 15, 2020, to repay the loan (or October 15, 2020, if you file an extension). However, taking advantage of this extended time frame to repay could lead to complications if you’d like to roll over your 401(k) balance to a new employer’s plan, says Michael Weddell, director of retirement at benefits consultant Willis Towers Watson.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
You can generally borrow up to half of your 401(k) balance, but no more than $50,000. Most plans charge the prime rate plus 1 percentage point for the loan, which as of mid February would add up to 6.50%. You generally have five years to pay back the loan while you’re still working for that employer or longer if the 401(k) loan is to buy your primary residence. Most plans give employees 10 to 15 years to repay a loan for a primary residence, although some plans have deadlines as short as five years or as long as 30 years, says Weddell.
If you do take a 401(k) loan, try to keep contributing to your 401(k) while you’re paying back the loan so you can continue to receive any employer match and to minimize the hit to your long-term savings. You borrow your own money and pay the interest back into your account. But you will lose the opportunity for investment gains on the borrowed money while it’s out of the account. Just because you had to take a loan, Weddell says, is no reason to give up on saving for retirement and earning an employer match.
-
Strong April Jobs Report Lowers Rate-Cut Hopes: What the Experts Are SayingThe June jobs report shows that hiring remains strong and gives the Fed a little extra breathing room when it comes to interest rates.
-
Don't Fall For These Five Costly Medicare MythsSigning up for Medicare can be complicated, and mistakes can be costly. Let's demystify these five Medicare myths to avoid expensive penalties.
-
I'm a Financial Planner: Here Are Five Lesser-Known Ways to Avoid Estate TaxThe clock is ticking on the estate and gift tax provisions in the Tax Cuts and Jobs Act, so the sooner you act on removing assets from your estate, the better.
-
The Future of Opportunity Zones: Outlook for 2025 and BeyondThere are three potential paths forward for this innovative tax incentive program that's set to expire in 2026.
-
First 100 Days: Trump's Impact on Your FinancesHere are some opportunities to consider regarding investing, interest rates and tax cuts as the financial landscape shifts under the new administration.
-
The Clock Is Ticking on Tax Cuts: Act Now to Avoid Missing OutEstate and gift tax exemptions are at an all-time high until the end of 2025. That may seem like a long way off, but setting things up could take longer than expected.
-
Plan Now, Save on Taxes Later: Tax Law Reset Is ComingDon’t let the sunsetting of provisions in the Tax Cuts and Jobs Act catch you off guard. Here are some ways to take advantage of lower tax rates now.
-
What You Can Do Now to Avoid Paying Higher Taxes in 2026Tax rates are set to increase once the Tax Cuts and Jobs Act sunsets at the end of 2025, but steps you take now could put you in a better financial position.
-
Year-End Tax Planning for a Financially Healthier RetirementGetting your tax ducks in a row for the end of the year can decrease your tax liability and make the most of your income, now and in retirement.
-
Three Ways You Can Flip the Script on Your TaxesDoes it feel like the tax code is beating you up at times? Instead of accepting that feeling of getting pushed around, here’s how you can pay what you must but no more.
