Can I Transfer My 401k Loan to Another Company?

When changing jobs, a common question is whether a 401(k) loan can be transferred to a new company. In most situations, 401(k) loans are not transferable between employer plans or financial institutions. This article clarifies why loan transfers are generally not possible, what happens to an outstanding loan upon job separation, options for addressing such a loan, and how a new loan might be obtained from a new employer.

Understanding 401(k) Loan Portability

A 401(k) loan is a unique financial arrangement, taken from your own retirement savings, not from your employer or a commercial lender. The loan agreement is specifically tied to the 401(k) plan of the employer who sponsored it. Its terms and conditions are governed by that particular plan’s rules.

A 401(k) loan is not transferable to a new employer’s 401(k) plan or an Individual Retirement Account (IRA). Its existence depends on your continued employment with the sponsoring company, as repayments are typically made through payroll deductions. No IRS regulations or industry practices permit the direct transfer of an existing 401(k) loan to a new retirement plan.

This differs significantly from a 401(k) account balance, which can often be rolled over into a new employer’s plan or an IRA when you leave a job. While the account balance represents your vested retirement savings, the loan is a specific obligation against those savings within the original plan. Therefore, while your retirement savings balance might move, the loan itself remains with the original plan.

Some exceptions exist, such as when a company is acquired or its 401(k) plan is terminated or merged into a new plan. In these specific scenarios, it might be possible for the outstanding loan to be transferred to the new plan, subject to the new plan’s rules and the terms of the merger. However, this is not a standard transfer available to an individual simply changing jobs.

Managing a 401(k) Loan After Job Separation

When employment ends with an outstanding 401(k) loan, most plans require the loan balance to be repaid in full within a specified timeframe. This period is typically short, often ranging from 60 to 90 days following the date of job separation. Some plans may allow for a longer repayment period, potentially extending until the tax filing deadline of the year in which the separation occurred, including extensions.

The plan administrator will usually notify the former employee of the outstanding balance and the repayment deadline. If the loan is not repaid by the established deadline, the unpaid balance is generally treated as a “deemed distribution” from the 401(k) plan.

The outstanding loan amount is added to your gross income, increasing your taxable income for that year. If you are under age 59½, an additional 10% early withdrawal penalty applies, in addition to ordinary income tax. The Internal Revenue Service outlines these rules under Internal Revenue Code Section 72(p). The employer or plan administrator will issue a Form 1099-R to report this taxable event. A deemed distribution does not eliminate your obligation to repay the loan to the plan, though it is no longer eligible for rollover.

Options for Addressing an Outstanding 401(k) Loan

One strategy is repaying the loan in full. This avoids the tax consequences and penalties of a deemed distribution. Funds for repayment might come from personal savings, an emergency fund, or a temporary loan from another source. Contact the former plan administrator for instructions on how to initiate full repayment, including accepted payment methods and the exact deadline.

Another approach is to allow the loan to default, resulting in a deemed distribution. While this avoids an immediate cash outlay, it carries significant financial repercussions. The outstanding balance becomes taxable income, and if you are under age 59½, an additional 10% early withdrawal penalty will apply. This option permanently reduces your retirement savings, as the defaulted amount cannot be recontributed or rolled over to another retirement account.

Any remaining 401(k) account balance not tied to the defaulted loan can still be rolled over to an Individual Retirement Account (IRA) or a new employer’s 401(k) plan, if it accepts rollovers. The Tax Cuts and Jobs Act of 2017 introduced a provision allowing the rollover of a “qualified plan loan offset amount” until your tax return’s due date for the year the offset occurred. This allows you to avoid taxation on the offset amount if you deposit an equivalent amount from outside sources into an eligible retirement plan.

Obtaining a New 401(k) Loan

While a 401(k) loan from a previous employer’s plan cannot be transferred, a new loan might be an option with a new employer. If your new employer’s 401(k) plan permits loans, you may be eligible to take out a new loan from that plan. This new loan would be separate from any prior loan.

Eligibility for a new 401(k) loan depends on the new plan’s rules, including criteria like your vested account balance and borrowing limits. Federal rules limit loans to the lesser of $50,000 or 50% of your vested account balance. This new loan would establish a fresh repayment schedule, typically through payroll deductions from your new employer.

Using a new 401(k) loan to address a previous defaulted loan is not a direct transfer. Instead, it involves taking a new loan from your new plan and using those proceeds to cover the tax liability or the original loan amount that was deemed a distribution. This approach helps manage the financial consequences of the old loan while maintaining a loan within a qualified retirement plan.