The specifics mentioned below apply to 401(k) plans but generally will apply to other plans.
The major exception to this is the 457 plan – funds are available for distribution without penalty at any age, upon separation from the employer sponsoring the plan.
Please consult your plan documents about the specific kinds of distributions that are allowed in your plan.
And always consult your tax adviser before taking any action that could trigger a taxable event.
As with an early partial withdrawal or cash-out, a defaulted loan will trigger the receipt of a 1099R, which will increase taxable income.
The net effect of cashing out a 401(k) account with a loan is that taxes and penalties will be paid on the entire account value, including the loan.
There will be a loan repayment time frame (this varies between plans), and there are penalties for deviating from the repayment plan.Note that, for the proceding reasons, Smart401k strongly recommends against this action.Cashing out prior to age 59½, even due to separation from employment, could have a drastic impact upon the balance of money received and upon income taxes.Employers cannot deduct taxes from rollover checks, so the employee is responsible for the balance of taxes the following tax season.The employee will receive a 1099R indicating that the loan was a cash payment to the account owner.