Know the tax rules before taking out a 401(k) loan

Although the economy is making a slow recovery, many families are still hard-pressed and working to make ends meet. As a result, some may have found relief by taking out a loan against their 401(k)s.

These types of loan allow workers to receive a tax-free chunk of money to cover medical costs, avoid falling behind on their mortgage or cover other needs. But some workers who took out a 401(k) loan, only to lose their job later on, may not have realized that they would be required to pay back their loan in full, MarketWatch reports. While some employers may allow their former workers a small grace period to pay back the loan, others may treat the loan as a retirement distribution payment, triggering tax penalties, the news source explains.

If the latter occurs, the distribution amount becomes taxable and individuals under 59½ will also be required to pay a 10 percent early withdrawal penalty, the news source adds.

Financial professionals often discourage Americans from making any type of early withdrawals from their retirement funds, but if hard times require it, consumers should speak with a tax preparer to educate themselves on the possible implications.

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Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs. 
Posted To: Tax Ranger's Blog By: Tax Ranger On: Thursday, July 14, 2011
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