what are the early withdrawl penalties

[Guest skully109]

I recently took out two loans on my 403(b) plans, one for $8000 and another for $4000. Well I started to make payments back and came up on the short end. My loans are now in default for $7,290.94 which is reportable and $3,262.53. What will happen to me now? What am I looking at for the penalties? is it bad or somewhat bad. I want to get an idea of how much this will affect me short-term long-term? Please help me so I can budget properly

[Michael Devault]

The amounts in default will be treated as "deemed distributions," which will cause them to be included in your gross income, thus taxable. In addition, unless you are age 59½ or meet another exception, there will be a penalty tax equal to 10% of the amount that's included in your gross income.

And, until you attain age 59½, sever employment, die or become disabled, the loans will continue to accrue interest. Only when one of the aforementioned events occur will the loan be "offset" by reduction of the accumulated value of your 403(b) account.

Finally, the defaulted loans will impair your ability to make future loans from your 403(b).

I hope this is of benefit to you.

[Guest skully109]

The amounts in default will be treated as "deemed distributions," which will cause them to be included in your gross income, thus taxable. In addition, unless you are age 59½ or meet another exception, there will be a penalty tax equal to 10% of the amount that's included in your gross income.

And, until you attain age 59½, sever employment, die or become disabled, the loans will continue to accrue interest. Only when one of the aforementioned events occur will the loan be "offset" by reduction of the accumulated value of your 403(b) account.

Finally, the defaulted loans will impair your ability to make future loans from your 403(b).

I hope this is of benefit to you.

Thank you for your input it is greatly appreciated. Do you know roughly how much this will really cost me if I made $40K this year. I just want to know if I will have to pay on taxes this year, if it will affect me now or later or both. Does that mean with the 10K owed now will it accrue interest for another 30 1/2 years

[Michael Devault]

The amount of taxes you owe are dependent upon a number of things, such as your filing status, exemptions and deductions. But, taxes will be due on the distribution in the year the distribution was made.

Based on your roughly $50,500 of gross income ($40,000 earnings plus the $10,500 deemed distribution), let's assume that you'll be in a 25% marginal income tax bracket. Based on that assumption, the deemed distribution will increase your taxes by $2,625 PLUS a penalty of $1,050, for a total of $3,675. Please keep in mind that these are approximations: The actual amount of income tax will be revealed as you complete your income tax return.

There's also a possibility that you will incur an additional penalty for under withholding. The $10,000 deemed distribution will increase your taxable income and, therefore, your tax liability. Since the US income tax structure is "pay as you go," the Code imparts penalties on those who don't pay enough during the year in the form of withholding from wages or other payments or by filing quarterly estimated tax payments. I'm not saying that this is certain to apply in your case, but only mention it as a possibility.

As for the loan, it will continue to accrue interest until such time it can be offset with a distribution from the plan, as I mentioned in my earlier post. You won't have to pay this interest out of pocket each year, but it will ultimately reduce the amounts you accumulate in your retirement account.