Pay a 401(k) loan with Inherited IRA Withdrawal?

Hi, not sure if this is an unusual question but here is my dilemma. In a nutshell I recently left my job of ten years and I am currently on severance looking for a new position. I need to roll-over the funds to an IRA soon but I have an outstanding loan of about 11k.

I don’t have the cash to pay it but I could take funds from an IRA I inherited last year. My gut tells me this is the best option because, although, I will get taxed on the withdrawal there isn’t a penalty and I don’t have to pay the tax at the time of withdrawal. I am also paying myself back and putting the money in a position where it can start working for me again. Are there any better options I am missing? Thanks!!



Check what options the plan is giving you. Your plan will avoid the penalty you would get with a deemed distribution, but the taxes would otherwise offset. If you pay it back with back due interest and then transfer the plan to a TIRA, you would then have access to your funds, but would then still face early withdrawal. No point in paying the penalty on a deemed distribution just to keep the penalty free inherited IRA in reserve. Also, a non spouse inherited IRA has an annual RMD, so you would be losing some tax deferral every year due to the RMD, so that is an added benefit.

One of the popular sources for funds in the past has been a home equity LOC, but the fees and problems now in the mortgage industry likely make that option less attractive now unless you have one already set up.



Thanks Alan. I am a little slow on the uptake this morning but am I understanding you to say that paying the 401(k) loan back with a withdrawal from my inherited IRA probably the best option unless my 401(k) plan allows me to do something else?



Don’t forget to distinguish a deemed distribution versus an offset distribution.
You can’t roll a deemed distribution. A deemed distribution would occur, for example, if a loan payment is not timely made. The plan can allow a 3 month grace period–I think you get until the end of the calendar quarter after the quarter in which the payment was due.



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