401(k) Loan Default Tax Calculator

When you separate from your employer (quit, fired, laid off) with an outstanding 401(k) loan, the plan typically requires repayment quickly — often by 60 days. If you don't repay, the unpaid balance becomes an "offset distribution" — treated as ordinary income, plus 10% early-withdrawal penalty if you're under 59½. Critically, under SECURE Act §401(c)(3) (effective 2018), you have until the tax filing deadline of the year of the offset (with extensions — typically Oct 15 of the following year) to deposit the equivalent amount into an IRA or new 401(k) to avoid the tax.

Functionally yes. A defaulted 401(k) loan triggers a "deemed distribution" (missed payments) or "offset distribution" (job termination) — both are taxed as if you took an early withdrawal. Ordinary income tax applies, plus the 10% penalty under IRC §72(t) if you're under 59½. The §72(t) exceptions (disability, medical, qualified higher ed, first-home purchase up to $10k, SEPP/72t) can waive the penalty if you qualify.

Pre-2018, you had only 60 days from the offset distribution to roll the money into an IRA — too short for most people who lost their job. SECURE Act §401(c)(3) extended this to the tax filing deadline (with extensions) of the year of offset — so an offset in March 2026 has until October 15, 2027 to be rolled. This applies only to OFFSET distributions (job/plan termination), NOT to deemed distributions from missed payments.

Yes — a 401(k) loan itself is not a taxable event when properly structured (max $50,000 or 50% of vested balance, repayment over 5 years, written terms). It only becomes taxable if you default. Compared to a hardship withdrawal (always taxable + 10% penalty under 59½), a loan is the cheaper option IF you can repay it.

Maximum loan = lesser of $50,000 OR 50% of your vested balance. Repayment must be at least quarterly, level amortization, over no more than 5 years (longer if used for primary residence purchase). Interest paid goes back into your own account — but is not deductible since it's interest on a loan to yourself. Plan-level rules can be more restrictive than IRS minimums.

The plan administrator issues Form 1099-R with code L (deemed distribution) or code M (offset due to separation). The amount appears on Form 1040 line 5a/5b (pension distributions) and any 10% penalty flows to Form 5329. Your tax software will pull the 1099-R automatically and assess the penalty if applicable.