July 11, 2023
Borrowing from your retirement savings is a quick, affordable, and convenient way of fulfilling your cash needs. However, the repayment terms vary depending on company and government regulations. If you are approaching retirement with an outstanding Verizon 401(k) loan balance, explore your options for a solution that guarantees maximum comfort.
How 401(k) Loans Work?
Borrowing against your Verizon 401(k) does not affect your credit score. Although individual plans determine the limits, the IRS also has rules regulating these loans. You can borrow 50% of the vested account balance or $10,000, whichever is higher. However, you cannot borrow more than $50,000. You may receive multiple loans from your 401(k) plan, provided the total amount does not exceed these limits.
Most plans allow a repayment term of up to 5 years. The period may rise to 25 years if you take the loan to purchase your principal residence. Your Verizon 401(k) plan allows repayment via payroll deductions. The interest rate and payment schedule are similar to typical bank loans. The main advantage is that interest earned increases your 401(k) account balance because you borrow from your savings.
401(k) loans also have friendlier requirements than bank loans. Potential uses include paying off higher interest debts, funding educational expenses, a down payment on a new house, and settling IRS debts. They are also useful for emergency repairs and other household expenses.
What Happens if You Leave Your Job with an Outstanding 401(K) Loan?
It’s advisable to fully settle your Verizon 401(k) loan before leaving employment. Late repayment or defaulting can have costly consequences. The Tax Cuts and Jobs Act (2017) grants defaulters until the due date of their tax return to repay outstanding debts.
If, as a 401(k) participant, you are leaving Verizon with an outstanding loan, you have the option of continuing to make loan payments directly to Fidelity on a monthly basis. To do so, contact Fidelity directly and ask to set up a monthly loan payment program.
Most 401(k)s encourage members to prioritize loan repayments to avoid these complications. You can do so by committing higher monthly installments, redirecting tax refunds towards loan payments, and tapping into other savings.
Consequences of Defaulting on a 401(k) Loan
Failure to service your Verizon 401(k) loan converts it into an early withdrawal and treats the unpaid amount as a taxable distribution. A deemed distribution attracts income tax and a withdrawal penalty of 10% of the amount owed. Your employer will submit form 1099-R to the IRS as proof of distribution.
You are legally required to continue servicing your outstanding 401(k) loan and accrued interest, even after paying tax for defaulting. Deemed distributions are not eligible for rollover distributions
A loan offset is another outcome of defaulting on your 401(k) loan. This option reduces your total account balance by the amount you owe. Unlike deemed distributions, loan offsets are treated as actual distributions, even if you won't receive the amount. You may transfer this offset to another retirement plan if it accepts rollovers. Plan administrators report such distributions via IRS form 1099-R.
Can You Withdraw from a 401(K) if You Have an Outstanding Loan Balance?
Each plan has unique rules regarding outstanding loans. If your Verizon 401(k) allows withdrawals, you may have to prove that you need the money for urgent needs. Most plans have a meticulous approval process to prevent trivial withdrawals that may negatively impact their tax-favored status.
You may withdraw under these circumstances if your 401(k) has an outstanding loan balance:
1. Roll over to a separate plan
Your former employer may allow a rollover to an IRA or another 401(k) if you were making timely loan repayments. The transferred amount will be your account balance, less what you owe. You're allowed up to the tax due date to clear your 401(k) loan balance.
2. Cash out
You can withdraw your Verizon 401(k) balance minus any outstanding debt. Automatic cash outs happen if you have less than $1,000 in your account, after which you’ll have to settle the amount owed by the tax due date. Your employer will deduct the outstanding loan from your 401(k) account balance if you have a history of defaulting.
3. Take another loan
Although it's harder to qualify for a second 401(k) loan, it's possible if your plan allows it. The allowable limit for additional lending is subject to IRS regulations. Federal tax rules allow you to borrow half of your vested account balance or up to $50,000, whichever is lower.
Lump sum withdrawals are subject to taxation since 401(k)s are pre-tax plans. It's advisable to incorporate required minimum distributions (RMDs) if you leave your account untouched after retirement. RMD amounts depend on factors such as age, account balance, and year of withdrawal.
Conclusion
Settling your Verizon 401(k) loan without defaulting allows you to enjoy the maximum benefits during retirement.
At Hapanowicz & Associates, we’ve been making it easy to retire from Verizon since 1999. Whether retirement from Verizon is years away, you're already retired, or you're in the “red zone” of reaching retirement from Verizon, you deserve to have all the information you might need to maximize your Verizon Retirement Benefits.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material. Investing involves risk including loss of principal. No strategy assures success or protects against loss.