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A 401(k) Loan When You Leave a Job: The Deadline and the Tax Math

By Smart Budget Sheets November 10, 2026
What happens to a 401(k) loan when you leave a job.

A 401(k) loan feels harmless while you are employed: payments come out of each paycheck and the interest goes back into your own account. The trouble starts when the job ends, by choice or not.

What happens to the loan

Most plans stop payroll repayments when you leave. If you do not pay the balance off, the plan usually “offsets” it: the unpaid amount is subtracted from your account and treated as a distribution.

A distribution is taxable income, and if you are under 59 and a half it can also carry a 10% early-withdrawal penalty.

The deadline that helps

Since 2018, a loan offset after leaving a job gets extra time. You can avoid the tax by depositing the same amount into an IRA or a new employer’s plan by your tax filing deadline for that year, including extensions. The money does not have to come from the old account; it can come from savings.

Example: $8,000 loan balance offset in November 2026. If you put $8,000 into a rollover IRA by the 2026 tax deadline (April 2027, or October 2027 with an extension), it is not taxed as a distribution.

If you need to cash out instead

Cashing out a 401(k) is expensive, so it helps to see the full cost first:

  • The plan normally withholds 20% for federal tax on a cash payment.
  • The 10% penalty applies if you are under 59 and a half, unless an exception fits. One common one: leaving that employer in or after the year you turn 55 (the “rule of 55”, for that plan only).
  • State income tax may apply too.

On a $40,000 cash-out for someone under 55 in a 22% bracket: about $8,800 federal tax + $4,000 penalty, before state tax. Roughly $27,000 left.

Ways to soften it

  1. Take only what you need, not the whole balance. Many plans allow partial withdrawals once you have left.
  2. Roll the rest into an IRA so it keeps growing.
  3. Look at the unemployment budget first: rent, food, insurance, minimum debt payments. Withdraw for the gap, not the full months.
  4. Ask the plan for the exact offset date in writing.

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General information, not financial advice. Figures are rounded examples.

#personalfinance #budgeting #retirement
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