I presently have a loan taken from my 401K ~ 6 years ago with a term of 15 years. I am 64 and would like to just pay the necessary tax on the loan amount as I am just paying myself back anyway. Can I do this and not pay the rest back? Thanks.
If you discontinue making payments on your loan the loan balance will go into default and will be classified as a distribution. You will be taxed on the outstanding balance. It is important that you review your Summary Plan Description before making any decisions as each plan has its own features and requirements and you may find that it is not as simple as just stopping the repayments. It would also be wise to check with your tax advisor, CPA or an enrolled agent to determine your specific tax implications.
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The answer is yes. You can default on your 401(k) loan by simply ceasing your payroll repayment. The IRS will have considered you to have made what is called a "deemed distribution". You will have to pay income tax on the defaulted amount. You will avoid the 10% penalty since you are over age 59 1/2.
For purposes of future loans you will have to consider the amount of the deemed distribution when calculating the maximum amount you can borrow. For example, loans are currently limited to one half of your vested account balance or $50,000, whichever is lower. Let's say, by way of example, that the $50,000 is the lower amount and that you are defaulting on the remaining $10,000 of your 15 year loan. In the future you will not be able to borrow more than $40,000 unless you were, in the future, to repay the $10,000. Actually it's a little more complicated than this in that the $10,000 deemed distribution should continue to accrue interest for purposes of calculating your maximum borrowing amount and for purposes of determining how much you must repay should you want to cover the defaulted loan. So if, down the road, you change your mind and decide to repay the loan you would have to pay it back with interest. Other than calculating your maximum future loan availability amount and the repayment amount the interest calculation has no effect on your ultimate 401(k) balance or its taxability.
Having said all this I would encourage you not to default on your loan. Yes you are paying yourself back but by doing so you are taking advantage of the opportunity to move money from a taxable account into a tax-deferred account.
Hope this helps.
As John points out, you CAN, in that there is no penalty. But does that mean you SHOULD? To answer this would require a bit more information on your cash flow needs, retirement plans, tax status and income situation. At first glance I would say why would you want to pay tax on all of that income all at once in a single year? You may be bumping yourself up into higher tax brackets, and have all kinds of unanticipated tax consequences. I would recommend you see a tax professional before doing this.