Taxation of 401(k) Loans & Withdrawals

 At one time or another, many individuals consider borrowing funds from their retirement accounts such as their 401(k) savings. They wonder what would be the tax consequences of such loans or withdrawals. Simply put, if the retirement plan allows such loans in the first place, and the individual abides by the terms of the loan, the borrowing would have no tax consequences. Violation of the retirement plan rules for loans or withdrawals, however, may result in a 10% penalty tax and also inclusion of the entire amount in the taxpayer’s income in the year that he violated such rules. For example, if you borrow $10,000 from your 401(k) as a loan in 2015 and agree to pay it back in 2016 but fail to do so, you will be subjected to a 10% tax on the amount that you failed to repay if you are younger than 591⁄2. In addition the same amount should be included in your income in 2016.       If you intend to borrow from your retirement plan savings, you should first carefully study the provisions of your retirement plan document related to loans and premature withdrawals. Some retirement plans don’t allow long-term borrowing. Individual Retirement Accounts (IRAs) are one such retirement plan. IRA account holders are required to return any withdrawals within 60 days. The same time limit applies if the IRA account holder intends to rollover some or all of his IRA savings to another retirement account. If he receives a check for the rollover amount and fails to deposit it in a new retirement account within the 60-day limit and he happens to be...