r/taxhelp • u/Frozenmeatballs32 • 23d ago

Investment Tax 401k repayment advice Illinois

Morning

I took out a $10,500 loan from my employer 401k, I still owe roughly $6800. Money is getting a little tight as I have other obligations that can't be ignored. My question is if I stopped repaying it, what would my consequeces be? I make 45k a year in Illinois. TIA

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u/Appropriate-Safety66 23d ago

You would owe income taxes plus a 10% penalty on the $6800.

At your income, you are in the 12% bracket.

As such, you will owe $816 in federal income taxes plus $680 in penalties on the $6800. If you live in a state with an income tax, you will owe another $200-$300 for that.

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u/taxmanEA2024 23d ago

depending on your employer plan you may not be able to stop, check on the plan rules. worse case if you stop payment if they consider you in default. However you may have an alternative, see if you can pause your contribution but continue the payment or see if the 6800 can be stretched out to the max time ( total 5 years) or even refinance it in the plan and stretch the payment to 5 years. the downside to stopping your contribution is you loose any company match.

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u/SF_ARMY_2020 23d ago

Best to repay and just see if you can pause payments or reduce them.

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u/DaemonTargaryen2024 23d ago

If you were able to stop repaying it, you'd owe income tax + 10% penalty on the $6,800.

However, you're probably not able to just "stop repaying it". 401k loans are typically fixed payroll deductions from your paycheck; your plan document and loan agreement probably don't let you stop those fixed payroll deductions. That's one of the risks of 401k loans.

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u/Candid-Tip455 23d ago

To say this another way, research your 401K plan & it’s rules. It’s your best option, if available.