asYes, if you take a withdrawal from a 401(k), you will pay tax on this withdrawal. Under some circumstances, you may be able to waive the early withdrawal penalty (if you are under the age of 59 1/2). Still, the income will always be subject to tax (except for qualifying Roth 401(k) withdrawals). Penalty-free withdrawals are often only for a specified dollar amount, and they are allowed for reasons that include the following: Your permanent disability. Medical expenses that exceed 7.5% of your gross income. To pay for health insurance if you lose your job. To satisfy an IRS levy.Paying off a loan to your 401(k), however, is not one of the exceptions. If you leave your current employer while you have a 401(k) loan balance and are unable to pay the loan in full, the remaining balance is a taxable distribution to you.

Question

If I use a 401k withdraw to payoff a 401k loan is it still taxed?

Forum|Forum|6 years ago
February 6, 2020
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SusanY1

asYes, if you take a withdrawal from a 401(k), you will pay tax on this withdrawal. Under some circumstances, you may be able to waive the early withdrawal penalty (if you are under the age of 59 1/2). Still, the income will always be subject to tax (except for qualifying Roth 401(k) withdrawals).

Penalty-free withdrawals are often only for a specified dollar amount, and they are allowed for reasons that include the following:

Your permanent disability.
Medical expenses that exceed 7.5% of your gross income.
To pay for health insurance if you lose your job.
To satisfy an IRS levy.

Paying off a loan to your 401(k), however, is not one of the exceptions.

If you leave your current employer while you have a 401(k) loan balance and are unable to pay the loan in full, the remaining balance is a taxable distribution to you.

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S

searob6

just to be clear i want to make sure if i took advantage of the penalty free traditional 401k withdrawal and used that money to pay off a 401k loan both in the same account am i required to pay taxes on this money. thanks

DawnC

Employee

You can waive the penalty on an early withdrawal from your 401K if the distribution was covid-related. The IRS rules say you have 60 days to deposit to another 401(k) or IRA—or to re-deposit it to the same account to avoid taxation. @searob6

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D

dmertz

Employee

Unless the loan and the withdrawal were from different 401(k) plans, the payoff of the loan by reducing the balance to your credit in the 401(k) should have been done by a offset distribution reported with code M (perhaps along with a second code) in box 7 of the Form 1099-R. The code M indicates that you have until the due date of your tax return, including extensions, for the year of the offset distribution to come up with the money to roll this distribution over to another retirement account, perhaps a traditional IRA, to continue to defer this income. If not rolled over, the distribution is taxable and subject to potential early-distribution penalty.