Can I Rollover My 401(k) If I Have a Loan?

If you have a 401(k) loan and are considering rolling over your 401(k) to a new plan or an IRA, it's essential to understand the implications and requirements involved. Here’s a comprehensive guide to help you navigate this process:

Understanding 401(k) Loans

A 401(k) loan allows you to borrow money from your own retirement savings, which you then repay with interest. While it can be a convenient way to access funds, it also comes with potential risks, especially if you are planning to roll over your 401(k).

Rolling Over Your 401(k)

A 401(k) rollover involves transferring the funds from your existing 401(k) account to a new retirement account, such as another 401(k) or an Individual Retirement Account (IRA). This can be done for various reasons, including changing jobs or seeking better investment options.

Impact of a 401(k) Loan on a Rollover

1. Outstanding Loan Balance:

   • If You Are Still Employed: Generally, you can roll over the portion of your 401(k) that is not secured by a loan. However, the outstanding loan balance is typically not included in the rollover amount.
   • If You Are No Longer Employed: If you have an outstanding loan balance and leave your job, you may be required to repay the loan in full within a short period. Failure to do so could result in the remaining balance being treated as a taxable distribution.

2. Repaying the Loan:

   • Before Rollover: It is advisable to repay the loan before initiating the rollover to avoid complications. Some plans allow you to pay off the loan by rolling over the balance, but this depends on the plan’s rules and the new plan's acceptance of such payments.
   • During the Rollover: If you cannot repay the loan before rolling over, the remaining loan balance will generally be considered a distribution and taxed accordingly.

3. Loan Offset:

   • Some plans have a "loan offset" feature where the outstanding loan balance is deducted from the total balance that is rolled over. This means that if you have an outstanding loan, the amount you roll over will be reduced by the loan balance.

Steps to Roll Over Your 401(k) with a Loan

1. Review Plan Documents: Check with your current 401(k) plan administrator to understand the specific rules and options available regarding loans and rollovers.
2. Repay or Refinance: Consider repaying the loan in full or exploring options to refinance it if possible.
3. Initiate the Rollover: Contact your new plan administrator or IRA provider to initiate the rollover process. Ensure that all necessary forms are completed accurately.
4. Track the Process: Follow up to confirm that the rollover is processed correctly and that any outstanding loan balance is managed according to the plan rules.

Tax Implications

• Taxable Distribution: If you cannot repay the loan and it is deemed a taxable distribution, you will owe income tax on the amount. Additionally, if you are under 59½, you may face an early withdrawal penalty.
• Avoiding Taxes: To avoid taxes and penalties, ensure that you understand the full implications of rolling over a 401(k) with an outstanding loan and follow all plan procedures carefully.

Conclusion

Rolling over a 401(k) with an outstanding loan requires careful planning and understanding of your plan’s rules. It is often beneficial to repay the loan before initiating the rollover to simplify the process and avoid tax penalties. Consult with a financial advisor to ensure you make the best decision based on your individual circumstances.