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Will the amount of an outstanding loan from my 401(k) be deducted from the total taxable amount of my 401(k) at retirement?

I have an outstanding loan from my 401(k) at the time of my retirement. I understand that I will pay taxes on that loan as earned income. Will the amount of my outstanding loan be deducted from my current 401(k) amount when I withdraw a lump sum at retirement? Or is the entire amount that's in my 401(k) currently subject to the 20% tax withholding?

Debt, Retirement, 401(k), Taxes
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February 2018

You are correct, the amount of your outstanding loan will be subject to income taxes at the time of your loan default (when you stop paying it back).  The remaining balance is subject to income tax at your ordinary income tax rate.  The 20% withholding comes into play if you take money directly out of the plan as a payment to you.  If you roll the 401(k) to an IRA, there is no tax for that transaction.  As you take money out of the IRA, you can tell your investment company the percentage you want withheld at each distribution.

Try to only take out money when you need it, not in one big lump sum.  That will only increase your taxes in one year, when spreading out the distributions could keep you in a lower tax bracket.

February 2018
February 2018