Paying off a 401K loan

[Guest mtbon]

I currently have a 401K with my current employer and one from a previous job. I am looking to roll the old 401K money into the current plan. The current plan has a loan outstanding. To pay off the loan, the current plan only accepts bank certified checks. Why can't I use some of the rollover proceeds to pay off the loan? The old 401K money will eventually be invested in the current plan, why can't it just pay the loan off to get there? Thanks.

[QDROphile]

You can accomplish what you wish by taking a distribution of your old 401(k) balance, but rolling over only a portion to the new plan. The portion you don't roll over will be taxable. You may use that taxable money (net of taxes, effectively) to pay the loan.

If you don't like that idea, at least you now have a clue about why the rollover amount cannot be used to pay the loan.

[401 Chaos]

Just to amplify what QDROphile said, you are required to pay off the loan with after tax money.

A rollover of the old 401(k) money to a new 401(k)e is beneficial precisely because it allows you to defer taxes on the amounts set aside in the old 401(k) on a pre-tax basis. Once those amounts are distributed from the combined 401(k) plan, they will be subject to income taxes. If you used the rollover amounts to pay off the loan, you would be paying off the loan with pre-tax money and would have already pocketed the loan amount. In short, you would basically be getting a tax-free distribution from the 401(k) and that won't work.