Ramdom numbers. 401k of $10,000. outstanding loan @ $3500 When cashing out, the penalty and extra withholding would be on the entire amount of 10k or on the amount remaining after paying off the loan ? Seems the entire amount would be subject to the extra withholding and penalty, then loans paid off and the remaining amount sent. But that doesnt mean there is a loophole i didnt know about.
https://www.smart401k.com/resource-center/retirement-strategy/40... Seems i found my answer Cash out the 401(k) account:The net effect of cashing out a 401(k) account with a loan is that taxes and penalties will be paid on the entire account value, including the loan. But since the employee already received the loan money, the distribution will not include that amount. Here is an example based on a total account value of $10,000 – with $5,000 of that being a loan:
No taxes have been paid on the loan, so taxes will be taken based on the entire account balance – the employer will withhold 20% of $10,000 for federal income tax, which is $2,000.
An additional 2% to 8% will likely be withheld for state income taxes.
The 10% early withdrawal penalty will apply to the entire $10,000.
Assume for this example that the employee lives in a state with a 5% automatic income withholding: 20% withheld for federal taxes, 5% withheld for state taxes and a 10% penalty means that 35% of the account balance will be withheld ($3,500). On top of that, $5,000 already was received in the form of the loan. So the employee would receive $1,500 in this scenario.
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