My understanding is that if I am over age 55 and default on a loan through my 401(k) plan when leaving the company, the 10% penalty is forgiven. Can you confirm that for me?

If you default on a loan from your 401(k) plan, you are considered to have received a distribution from your 401(k) plan . Whether or not you will have to pay the 10 percent additional tax on early distributions from 401(k) plan depends on a number of factors, including your age.

In order to avoid the 10 percent additional tax on early distributions from qualified retirement plans, the following all must be true:

• you received the distribution after you left the company; and
• you left the company during or after the calendar year in which you reached age 55; and
• your departure from the company qualifies as a separation from service.

In addition, you may avoid the 10 percent additional tax if you meet one of the other exceptions shown in Publication 560, Retirement Plans for Small Business and Publication 575, Pension and Annuity Income.

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