Borrowed from 401k not paying back

Sunghwan34
Sunghwan34 Member Posts: 1 Newcomer
in Income

Hello,

Financial advisor said to talk to a tax specialist to see if i could consider the borrowed money from my 401k to pay for down payment on a new home would be OK to do. For example, could I not get penalized and consider it as ordinary income as i wouldnt need to pay it back when filing for income tax?

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Answers

  • MaryM
    MaryM FreeTaxUSA Agent Posts: 7

    Hi Sunghwan34,

    I believe you are referring to taking a loan from your 401k plan. When you take a loan from your 401k, if you don’t repay the loan, including interest, according to the loan’s terms, any unpaid amounts become a plan distribution to you.

    The IRS has some information on taking loans here:

    https://www.irs.gov/retirement-plans/considering-a-loan-from-your-401k-plan

    Distributions taken for first time home purchase does not qualify for the exception for the additional 10% penalty if taken from a 401k. This exception would only apply to distributions taken from an IRA.

    You can see more information about these exceptions here:

    https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions

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