By Sarah Okeson
July 31, 2020
If you have a 401(k) loan but your employer hasn’t reopened, you’re probably still on the hook to repay the loan, says Virgil Rutili, a certified financial planner.
“My best guess would be if the employer doesn’t reopen, it doesn’t change the fact that you still have the loan,” said Rutili, “I don’t think that there’s loan forgiveness.”
Not all companies allow employees to borrow against their 401(k) plans, and financial advisors say it usually isn’t a good idea. Yes, borrowers pay interest to themselves on the loans, but they lose the benefit of saving and growing untaxed money. Furthermore, the borrower ends up repaying the loan of tax-free money with after-tax money. (If you borrow an untaxed $100, depending on your tax bracket, you’ll need $125 or more of taxable income to pay it back, plus interest.)
Emily Allen, a certified financial planner in Houston, says the Coronavirus Aid, Relief and Economic Security Act passed by Congress in March changed some of the rules on borrowing from 401(k)s to help people during the pandemic.
The Cares Act increased the amount employees can borrow from $50,000 to $100,000, or all of the 401(k) that is vested, whichever is lower. This will be in effect until Sept. 23.
Employees can get a one-year extension on repaying loans that are due between March 27, 2020, and Dec. 31, 2020, although interest will continue to accrue. This applies to current employees, employees who have been furloughed, and employees who have taken a leave of absence.
Rutili says employees who have borrowed from their 401(k)s and are laid off, quit, or are terminated will have the money treated as a distribution, in most cases.
The Cares Act waives the additional 10% penalty for people younger than 59½ who take up to $100,000 out of their 401(k).
Employees who want to get their loans extended or take money out without an additional penalty need to be financially affected by the pandemic, unable to work because of childcare needs caused by the pandemic, been diagnosed with Covid-19, or have a dependent spouse diagnosed with Covid-19.
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