Question

Briefly discuss the tax consequences to employees if they have a 401K and they leave their employer

Answer 1

Workers who have an outstanding loan from their 401(k) account when they leave their employer also get some relief.

Generally speaking, when you leave your job — voluntarily or otherwise — and still owe money on a loan from your 401(k) account, your employer will give you a short window to repay it. If you do not, the amount gets deducted from your account balance. In other words, you pay off that loan whether you want to or not.

However, pre-2018, if you rolled over your remaining 401(k) balance to an IRA or another employer plan, you would be taxed on the loan balance unless you could come up with that amount to contribute to your rollover account within 60 days. In other words, the loan balance had been treated as a taxable distribution at that time and potentially subject to a 10 percent early withdrawal penalty.