Q: I read something several months ago about taking a loan from your 401K retirement plan. If you were at least 55 years old, you were not required to pay this back and there was no penalty for this. Is that true?
A: From a technical standpoint you still must repay the loan. If you don't repay the loan, regardless of how old you are, then the loan becomes a distribution. The tax treatment and potential penalties for such a distribution will then be dependent upon your age. The key point is whether a 10% penalty will apply to the distribution. If you are over 59 and 1/2 then no penalty will apply. If you are over 55 some exceptions to the penalty apply such as a distribution upon a separation from service, meaning that you no longer work there. Regardless, the distribution would be subject to ordinary income tax. For more detailed information please go to Publication 590 on the Internal Revenue's website at www.irs.gov. This publication includes much more information about early distributions and may help you more fully understand the consequences of your decision to borrow or withdraw from your 401k plan.
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