What Happens on Loans From My 401(k) at Work After I've Been Fired?

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A 401(k) loan allows you to borrow against the money in the account and requires you to repay yourself, plus interest. The loans may seem like a quick, convenient option. There's no credit check and a low interest rate. Although a 401(k) loan has some advantages, there's a risk involved. If you're fired from your job, the 401(k) loan becomes due immediately.

Tax Consequences

Your 401(k) loan balance is due whenever you leave the company, whether you're fired, quit or get laid off. According to 401khelpcenter.com, you'll generally have two months to repay the loan. If you can't pay the loan, the balance is treated as a taxable distribution and you'll be required to pay taxes on it. If you're under age 59 1/2, you'll also face a 10 percent tax penalty.

Avoiding Taxes

You can avoid the taxes and penalty if you deposit the amount of your balance in the 401(k) loan into an individual retirement account or other type of retirement account within 60 days. If you want to avoid the taxes and penalty but no longer have the money from the 401(k) loan, you might take out a bank loan or tap into another source to pay off the balance.

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