401(k) Loan After Layoff: You Might Have More Than 60 Days

A 58-year-old worker who was laid off with an outstanding 401(k) loan recently assumed she had just 60 days to replace the money. The tax code, however, might give her significantly more time than that, depending on how the rules apply to her specific situation.

The general rule is that when you leave a job, any outstanding 401(k) loan generally must be repaid by the due date of your federal income tax return for that year, including extensions. Many people mistakenly believe the repayment deadline is strictly 60 days after termination, but the IRS often allows borrowers until their tax filing deadline, which can be months later.

If she misses that extended deadline, the unpaid balance would be treated as a distribution, subject to income taxes and, because she is only 58, the 10% early-withdrawal penalty as well. This could significantly shrink her retirement nest egg and potentially bump her into a higher tax bracket.

The woman's case illustrates the importance of understanding the nuances of retirement plan loans during layoffs. Consulting a tax advisor and reviewing IRS Publication 575 can help ensure she takes full advantage of any extension and avoids unexpected tax liability. With careful planning, she may have far longer than the 60 days she feared.