Can a 401k loan be transferred?

If you are paying a 401(k) loan and you lose your job, you could be wondering what to do with the loan. Do you leave it with the soon-to-be former employer or do you transfer it to your new retirement account? Usually, when you quit or leave your job, you will have to pay off the loan before the tax deadline. If you are unable to pay the 401(k) loan, any outstanding balance will be considered an early distribution, which triggers income taxes and a 10% penalty tax.

Normally, a 401(k) loan cannot be transferred to another retirement account. If a plan allows partial rollovers, you may be able to rollover the 401(k) balance minus any outstanding 401(k) loan balance. Some employers do not allow partial rollovers, and you may be required to pay off the 401(k) loan fully before you can rollover the 401(k) balance. However, if the company is acquired or sold, you may be allowed to rollover the 401(k) account, including the outstanding 401(k) loan, to a new employer’s 401(k) plan.

Can a 401(k) Loan be Transferred If My Company is Sold?

If your company is sold or acquired by another company, the 401(k) plan may either be merged into the new company, maintained separately, or terminated. If the plans are merged, your 401(k) account will be subject to the rules of the new plan, and you will continue paying the outstanding 401(k) loan to the new plan. If the plans are maintained separately, the old 401(k) plan will continue unchanged, and the acquired company will continue managing its retirement plan. You will be required to continue paying any unpaid 401(k) loan to the old plan.

However, if the 401(k) plan is terminated, you may be allowed to transfer the retirement assets to a new retirement account. Most 401(k) plans may allow participants to move their 401(k) money and any outstanding 401(k) loan to a new employer's 401(k) or Solo 401(k). You can also rollover the 401(k) to an IRA, but you will be required to pay off any unpaid 401(k) loan before the money is rolled over.

What happens if you default on a 401(k) Loan?

The biggest cause of 401(k) loan default is separation from one’s job. Once you leave your job for whatever reason, your former employer can no longer deduct your paycheck to meet the loan payments. This opens the door to defaults, since you will be responsible for making loan payments on time.

When a default is on the horizon, you have two choices; to pay back the outstanding loan balance or let the loan default. Paying the unpaid 401(k) loan in a lump sum will absolve you from any tax liability. However, if you let the outstanding loan default, the consequences can be steep. The unpaid balance will be considered a distribution, and you will owe income taxes on the lump sum of income at your tax bracket. Also, there could be an additional 10% penalty if you are below 59 ½. When a defaulted loan is considered a distribution for tax purposes, you will have removed a sizable portion of your tax-deferred retirement savings, and you will not be able to restore the tax-deferred status of these funds.

Can a Loan Offset Be Rolled Over?

A 401(k) plan may require that, if an employee quits the company, any outstanding 401(k) loan be offset against their 401(k) balance. In this case, the plan loan offset is the unpaid loan balance that reduces your retirement savings. The IRS treats loan offsets as an actual distribution for tax purposes, and you may be able to rollover the loan offset to a new employer's 401(k) or another qualified retirement plan.

Before 2018, the IRS required 401(k) participants to rollover any loan offsets within 60 days. However, the Tax Cuts and Jobs Act extended this period to the tax due date for federal tax returns. You can avoid paying tax on the loan offset amount by rolling over to an IRA or Solo 401(k) before the tax due date. The rollover should be funded from your other assets to extinguish the tax liability.

To Roll Over or Not to Rollover

When you leave your job, you should decide what to do with your retirement savings. You can decide to rollover the 401(k) to another retirement account or leave it in the old employer’s plan. Usually, you must have a 401(k) balance of at least $1000 to leave the retirement savings in your former employer’s 401(k) plan. However, you will no longer contribute to the old employer’s plan, and your retirement savings will continue accumulating 401(k) fees.

If you have built a sizable 401(k) balance over the years, you should consider rolling over to an IRA. An IRA offers a wider variety of investments, which allows you to pick investments with the best returns and low fees. You also have the option of opening a Roth IRA, which allows you to pay taxes now, and take tax-free distributions in retirement.