This seems like a no brainer to me but I want better minds to weigh in.

I took a 401k loan 3 yrs ago to pay some one time expenses. Been paying it off slowly but still owe about 80% of it. I'm retiring in less than 6 mos. I have plenty of cash on hand to pay it off but I'm asking myself if that's the right answer. If I choose not to pay it off I believe I get taxed this yr on the loan balance at my current tax rate .

I won't be taking rmd's from my 401k until required 8 yrs from now.

Effective tax rate this yr is expected to be about 30%

Effective tax rate projected in retirement to the degree you can project that is 22%.

I'm not sure if just continuing to pay off the loan over time and not getting taxed is an option after retirement or not?


Seems like an easy choice to go ahead and pay it now and avoid the 2024 tax hit but am I missing something?

Lower marginal bracket in future years makes this close to a no-brainer to me.

Assuming you are over 59.5…. You could pay off loan and take a distribution from 401k/IRA in January at a lower tax rate. Would be back to same liquidity level with better tax outcome.

Taking distribution in January isn't necessary, just helps illustrate why paying back this year likely makes sense.

Congrats on your looming retirement!

I'm 64. Yes , that was my line of reasoning as well. Pay taxes at the lower marginal rate and well down the road in time seems to make the
Most sense.

Thanks!

I think so but not 100% sure if there is an option to leave the 401k alone and continue paying off the loan over time. I have no plans to touch it for 8 yrs.

I could roll it into an IRA but I don't believe you can roll the loan as well. Almost sure that would trigger a requirement to pay it. As you suggest , just my retirement may trigger the requirement to either pay it off or pay 2024 taxes on it . The latter i do not want to do.

I think I'll just pay it off before retirement.

8 years of tax free growth makes it a no brainier IMHO

Also, since you are over 59.5, if you change your mind in a year or two you can just withdraw the money and pay tax on it.

Once you terminate employment that outstanding loan balance becomes payable and taxable. That's an IRS rule, probably a company rule as well, they have no control over you once you retire. Most companies make you roll to an IRA upon retirement as well, that also makes loans payable or taxable.

I don't understand your comment that ending employment makes the loan balance payable AND taxable . If you pay it off then what is taxable ? Obviously the distributions are taxable whenever you take them.

Now I do understand if you don't pay it off then it's treated as income that day and taxable in that year.

We can keep our 401k after retirement /end of employment but most people roll it into an IRA just for sake of having it all
Consolidated and in one place.

Your understanding is correct.

You either pay it off and it goes back into the 401k, or you don't and the remaining balance of the loan is considered a withdrawal and subject to income tax.

If your 401(k) provider is taking loan repayments via payroll deduction from your employer, then your loan will default at the end of the second quarter after your date of termination.

If your 401(k) provider is accepting loan repayments directly from you via ACH, then you can likely continue to pay it off post termination.

The act of terminating doesn't technically trigger the loan defaulting, it's the missed loan repayments for up to 2 quarters that triggers the loan default.

Again, ask your custodian. The IRS has rules, companies have augmenting rules. For example, if you have a loan and switch custodians without paying off the loan it becomes a taxable distribution. Some companies treat retirement differently than others but once you change the terms of paying back that loan you might find it's not a loan anymore., We can't tell you, call your custodian.

You were correct that calling the custodian was the best approach, however I wouldn't have known to ask about the option of continuing to pay off the loan directly to the administrator had I not gone thru the exercise of posting the question here and getting the benefit of this board's
Feedback.

BigNastyNate was correct with regard to my particular employer sponsored plan. It does indeed have an option to continue to pay off the loan just like I do via payroll deduction but through an automatic deduction set up with the administrator which seems to me to be the best of all of the options.

Thanks to all of you for your input! It turns out this was not a no brainer.