What happens to your 401(k) loan if you leave your job

The timeline, step by step

1. You leave. Quitting, a layoff and a firing are treated the same way.
2. The plan asks for the balance. Your plan document decides when. Some plans offset the loan as soon as you take a distribution or roll the account out; some give you a set period first; some let you keep paying.
3. The offset. If you don’t repay, the plan subtracts the unpaid balance from your account. That amount is now an actual distribution, reported on Form 1099-R (code M when it’s a qualified plan loan offset).
4. Your rollover window. You can deposit the same dollar amount, from any source, into an IRA or a new employer’s plan that accepts rollovers. Do that by the deadline and the offset isn’t taxed.
5. Whatever isn’t rolled over is income for the year of the offset, plus the 10% additional tax if it applies.

You have until your tax deadline, not 60 days

Before 2018, you had 60 days to cover a loan offset, which is why so many job changes ended in a tax bill. The Tax Cuts and Jobs Act changed that for offsets caused by leaving a job. Under IRC 402(c)(3)(C), a qualified plan loan offset can be rolled over until the due date, including extensions, of your tax return for the year the offset happened.

To qualify, the offset has to happen:

• only because you left your job (or the plan was terminated) and couldn’t meet the repayment terms, and
• within 12 months after you left.

If you left in March 2026 and the plan offset the loan in June 2026, you have until April 15, 2027 to deposit the money. File an extension and you have until October 15, 2027. An offset that happens more than a year after you left, or for another reason, gets only 60 days.

What it costs if you can’t come up with the money

Here’s a worked example. You’re 42, in the 22% federal bracket, with a 5% state tax, and you leave with $12,000 still owed.

	Amount
Unpaid balance offset	$12,000
Federal income tax at 22%	$2,640
State income tax at 5%	$600
10% additional tax (under 55 in the year you leave)	$1,200
Total cost of not repaying	$4,440

That $4,440 comes due when you file, on top of whatever else you owe. Roll over half the balance and you cut it in half. The calculator above runs this for your own balance; open “Cutting contributions or leaving your job” and pick a month.

The age 55 rule

If you leave your job in or after the calendar year you turn 55, the 10% additional tax doesn’t apply to distributions from that employer’s plan, including a loan offset. The income tax still does. For qualified public safety employees the age is 50, or 25 years of service under the plan, whichever comes first.

This applies to the plan of the job you left. Money you roll to an IRA loses it, because the age 55 exception doesn’t cover IRAs.

Ways to cover the offset

• Cash you have. Savings, a severance check, an emergency fund.
• Your next employer’s plan. If it accepts rollovers, you can deposit the offset amount there. You still need the cash to make the deposit.
• A personal loan. Borrowing to fund a rollover is allowed, since the money can come from any source. Compare the loan’s total interest and fees with the tax you’d avoid ($4,440 in the example above). If the interest is lower and you can carry the payment, it can come out ahead. The comparison tool does that arithmetic.
• Part of it. You can roll over any portion. Each dollar you deposit is a dollar that isn’t taxed.

Before you give notice

If you’re planning to leave, the cheapest move is to deal with the loan while you still have a paycheck: ask the plan for a payoff amount, ask whether you can keep paying after you leave, and write down the offset date once you know it. If a layoff is the reason, ask whether your severance can be applied to the loan.

The deadline rules above come from the statute and the current IRS regulations at 26 CFR 1.402(c)-2(g). Your plan’s own loan policy decides when the offset happens.