401K Loan Default: When is a disbursement not a disbursement?
July 2, 2009 8:22 AM Subscribe
I discovered today that I have defaulted on a 401K loan in the amount of $3,896.31 ... help me figure out what the penalties will be & if the confused-sounding rep at Fidelity really knew what she was talking about.
I discovered today that I have defaulted on a 401K loan in the amount of $3,896.31 due to a combination of Fidelity being inept (they sent the notice to an incorrectly spelled street address) and my HR dept. giving me bad info (they told me the loan would be suspended while I was out on FMLA, but it was not). Fidelity informs me that
a) my payroll deduction payments will stop and cannot be restarted - to repay now I'll need to pay by coupon/check;
b) my defaulted loan will continue to accrue interest until paid off;
c) even if I pay it off within 60 days of the date of default (June 30th), I'll still have to pay the IRS penalties & the amount will still count as part of my taxable income.
I know you are not my tax professional but I don't have a tax professional, and can't afford at this moment to hire one, so you'll have to do.
1) Is the info I got from Fidelity correct? I'm a bit puzzled that it will both be considered a disbursement and still need to be repaid with interest. That seems like double dipping to me. I have previously (many years ago) had a 401k loan turn into a disbursement (due to end of employment) and it was just a disbursement - there was never a demand I also repay.
2) Can you help me calculate what my penalty payment will be (not counting the additional tax I'd need to pay with amount as part of my taxable income)? Will it be a flat 30%, or is it more complex than that.
3) I am expecting a large insurance settlement within the next few months. This money will not be taxable. If I put some of this not-taxable money into, say, an IRA, what (if anything) will this do to offset the tax hit I'll take for this disbursement.
Again, I know you are not my tax professional. Our finances are very tight (what with FMLA and medical bills and so forth) until the claim settles, but if I can avoid penalties by repaying within 60 days, that will be another stick to use to encourage my attorney to get things wrapped up.
Other things you may need to know: I'm in the USA. I was on unpaid medical leave for 12 weeks but have now returned to work. My employment status has not changed.
Thank you for your help.