If you can’t pay your 401(k) loan

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Q. I’m afraid I may lose my job and I have a 401(k) loan for $8,000. I don’t have extra money to pay it off and if I lose my job, it will only be worse. What would the penalties be for not paying it back, and should I take money from my credit accounts if I have to?
— Still working

A. Taking a loan from a 401(k) often seems like a good idea, but if your job changes, it could be a nightmare.

When a person changes jobs, any 401(k) loans become taxable income, said Michael Karu, a certified public accountant with Levine, Jacobs & Co. in Livingston.

“You would pay tax on the $8,000 at your marginal rate,” Karu said. “There also is a 10 percent early distribution penalty.”

But there are a variety of exceptions that eliminate that penalty, Karu said. These include:

1. Rollovers to another IRA, which also eliminates any income taxes that may be due
2. Disability
3. Medical costs exceeding 7 1/2 percent of your Adjusted Gross Income, which rises to 10 percent after 2018
4. Separation from service at age 55 or older
5. Substantially equal periodic payments
6. Military reservist called to active duty
7. Public safety employees separated after age 50
8. Levies from the Internal Revenue Service
9. Education expenses (This only applies to IRAs, not 401(k) withdrawals)
10. Court ordered spousal payments
11. First time home buyer (This only applies to IRAs, not 401(k) withdrawals)
12. Distributions to beneficiaries
13. Payments used for medical insurance while unemployed
14. Anyone aged 59 1/2 or older

There also are provisions for hardships, Karu said. These include:

1. A primary home purchase
2. Higher education costs including tuition, room and board, and fees for the next 12 months for you, your spouse, your dependents, or your children, even if they are no longer your dependents
3. To prevent the eviction or foreclosure on your primary residence
4. Severe financial hardship
5. Tax-deductible medical expenses that were not reimbursed for you, your spouse, or your dependents

“In this case, you would need to prove that a severe financial hardship occurred because of your job loss,” Karu said. “You would still be taxed on the $8,000, but wouldn’t have the 10 percent penalty.”

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