Question:
What happens if I default on a loan?

Answer:
If you default on a loan from your account, it is considered to be a “deemed distribution.” If the loan is from your pre-tax account, you’ll owe income taxes on the money, and if you’re under age 59½, an additional 10 percent early withdrawal penalty may be assessed on the amount that is being defaulted. If the loan is from your Roth account, the deemed distribution will not be treated as a qualified distribution. If you have a defaulted loan you will not be allowed to take another loan.