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Can you pay off a 401k loan with another IRA account?

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First, Never borrow from your 401k plan. You can pay off your 401k loan with money form any legal source. The money does not need to be deducted from your pay check. That is the most convient method. To use money from an IRA, it would be necessary to take an UNQUALIFIED DISTRIBUTON from your IRA. If this is a Traditional IRA, the mney would be subject to income tax. And if you are not yet at the age of 59.5 years, a 10% penalty would be assessed on the amount taken from the IRA. This 10% would need to be paid when you file your income tax return. If this is a ROTH IRA, there are some different rules. Distributions from a ROTH IRA come out in an ordered fashion.
- First to come out is our annual contribution amounts. These amounts come out free from tax and free from penalty.
- Second to be distributed from a ROTH IRA is our Conversion Contributions. Conversion amounts are distributed tax free. A 10% penalty may apply if the conversion is less than 5 years old. Each Conversion has it's own 5 year clock.
- Last to come out is earnings. If the ROTH IRA owner is younger than 59.5 years, the earnings will be taxed and the 10% penalty will apply.
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