What is an Open Loan in my Retirement Account and How Does it Impact My Rollover?

What it is:
  • It's a debt to yourself: You've borrowed money from your own retirement savings.
  • Repayment schedule: You're making regular payments (usually through payroll deductions) to pay back the loan principal plus interest.
  • Consequences if you leave your job: If you leave your job before repaying the loan, it's typically treated as a distribution. This means you'll owe income taxes on the outstanding balance, and if you're under 59 1/2, you might also be subject to a 10% early withdrawal penalty.
Here's why it matters when rolling over your 401(k):
  • You can't transfer an open loan: Your 401(k) cannot be rolled over into a new plan or IRA until the loan is either repaid in full or distributed.
What to do:
Options for handling an open loan during rollover:
      1. Repay it in full: The most popular option is to repay the loan completely before initiating the rollover.
      2. Take a distribution: If you borrow money from your retirement account and don't pay it back, the government is going to assume you took it out as income and tax you accordingly
      3. Some plans allow loan transfer: In rare cases, your new plan might allow you to transfer the loan, but this is uncommon.

The frequently asked questions, or FAQs, are intended to be helpful and to get you thinking in a more sophisticated manner about your account transfer and related issues. However, these are not meant for accounting, tax, finance, or legal advice, not intended to be exhaustive, and do not create any relationship or duty on our part to assist your particular situation. We offer no warranties on the accuracy or completeness of the information as there could be developments of any kinds, including, but not limited to, any changes in relevant laws and regulations.