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If Laid Off, Must I Pay 401(k) Loan Penalties?

Question: I was recently laid off, and I have a loan from my 401(k). Do I have to pay penalties on this since I lost my job through no fault of my own?

– Michael Farmer, Martinsville, Va. 

Answer: Alas, even though you lost your job through a layoff, experts say you’re still on the hook for that loan repayment if you want to avoid defaulting and having to pay ordinary income tax on the remaining loan amount—in addition to incurring early-withdrawal penalties. The good news, says Katie Umile, CEO of registered investment adviser iCapital in Boston, is that your employer or 401(k) provider might work with you, by accepting loan payments directly in lieu of the payroll deduction taken when you were still an employee. Also, you may have a window of 60 to 90 days after your layoff to pay back the loan and interest in full, says Umile, so be sure to check the documentation that came with your loan.


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