401(k) loans convert to taxed withdrawals when workers leave jobs

Evidence

There is one alternative to a costly withdrawal: a loan from the retirement account. The proceeds from a 401(k) loan are tax-free, because you are obligated to repay them, and because they do not constitute income, they don’t come with the 10 percent penalty. The problem is that the default rate is high: 80 percent for blacks, and 71 percent for whites. Employees default on loans if they quit their job (or are fired) and do not pay off the loans within sixty days. At that point, the loan is converted to a withdrawal and the employee is hit with the penalty. — Dorothy A. Brown, The Whiteness of Wealth, 401

Categorization

• DEFINE: Precisely names the 401(k) loan mechanism: tax-free proceeds, but 80-percent black default rate when job changes trigger the 60-day repay deadline, converting to taxed withdrawal.