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How do I take a Loan on my 401k?

Feb 28, 2014 by Joe from Tulsa, OK in  |  Flag
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Peter C. Karp Level 20

Joe,

In regards to getting a loan from your 401(k) plan, we always recommend that you explore other options first as it can be very difficult to make up lost earnings from your 401(k). There are fees associated with obtaining a loan and it could impact your retirement income. If you must get a loan from your 401(k) plan you need to contact your HR department to find out if your plan offers a loan provision. Keep in mind that there are certain rules associated with taking a loan from a 401(k) plan, such as you can only borrow the lesser of 50% of your vested balance or $50,000. You repay the loan through salary deductions with interest and after tax dollars. Because of the costs, many plans also set a minimum loan amount of $1,000.00 and restrict the number of loans a participant may have outstanding at one time. If you default on the loan any unpaid balance will be classified as a distribution and subject to income tax and may also be subject to a 10% early withdrawal penalty. If you leave your job the loan may be due and payable in full or may become a taxable event if you do not pay off the loan. Remember, the purpose of a 401(k) plan is to fund your retirement so don’t shortchange your golden years by treating it as a checking account.

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Comment   |  Flag   |  Mar 07, 2014 from San Francisco, CA

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Hi Joe,

I’ll assume you already know that your plan allows for loans. Not all plans do. If you are unsure ask your employer or get a copy of the Plan’s Summary Plan Description to find out.

The exact procedure for taking a loan from your 401(k) is dictated by your employer’s recordkeeper. Some require you to complete a paper application. Others allow you to create the loan online at your participant account. Either way your employer will need to review and approve the loan. Regardless of the application process the maximum loan amount is the lessor of $50,000 or ½ of your vested balance. The maximum loan term is 5 years with the sole exception existing for a new home purchase. In this case the term can be up to 30 years. However many plans do not allow for terms greater than 5 years regardless of the purpose.

Another consideration is how many loans you can take at one time. Most plans only allow one loan at a time. Until it is repaid the participant cannot take out a new loan. Some plans allow 2 or more simultaneous loans at a time.

There are many factors to consider as a participant when it comes to 401k loans. Be sure to read my Financial Guide on the subject entitled “Suffering the Slings and Arrows of 401(k) Loans” on my Brightscope profile. It is written from the plan sponsor’s perspective but you should find it helpful as well. I believe this link will take you to the article http://www.brightscope.com/financial-planning/advice/guide/9901/Suffering-The-Slings-And-Arrows-Of-401K-Loans/

Hope this helps.

Comment   |  Flag   |  Feb 28, 2014 from Woodbridge, VA

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Joe - You may or may not be able to take a loan out on your 401k. Each plan may or may not allow loans based on the rules the employer established for the plan.

Your best source of information is to contact Human Resources or Employee Benefits at the employer.

Comment   |  Flag   |  Feb 28, 2014 from Powell, OH

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The 401(k) Plan Adminstrator will let you know if you can take a loan and can set it up for you.

Comment   |  Flag   |  Feb 28, 2014 from Canton, GA

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