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How much money can i borrow the first time?

Oct 23, 2014 by amy from Tulsa, OK in  |  Flag
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Peter C. Karp Level 20

Amy

First of all, I always recommend that taking a loan from your 401(k) plan should be only as a last resort. This is money for your retirement and grows over time, tax deferred at a compounded rate and is funded through pre-tax dollars. You need to contact your HR Dept. to make sure your plan allows for loans and there is usually a limit on the number of loans you can have at one time. The minimum loan amount is typically $1,000. The maximum loan amount is the lesser of 50% of your vested account balance or $50,000. The loan is repaid through payroll contributions with after-tax dollars. If you terminate employment and have an outstanding loan it is usually payable in full at the time of termination and if not paid the outstanding balance is reported as taxable income. Remember, this is not a checking account, it is money for your future.

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Comment   |  Flag   |  Oct 30, 2014 from San Francisco, CA

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Amy,

Assuming your 401(k) plan even allows loans the minimum is usually $1,000 and the maximum is the lessor of 50% of your vested account balance and $50,000.

Understand that this is not really a loan. You would only be moving money from your retirement account into your checking account and then back, over time, as you repay the 'loan' through withholdings from your paycheck. No one is lending you anything. The cost of the loan is the lost appreciation on what your money would have made in the market, on a tax deferred basis, should you have not taken the money out. In addition the interest repaid with the loan is money you have already paid income tax on. And when you take the interest out of your 401k one day when you retire you'll pay income tax on it a 2nd time. I f you can't tell I'm not a great fan on 401(k) loans. Best to actually borrow the money from someone else, not raid your retirement fund.

Hope this helps.

Comment   |  Flag   |  Oct 23, 2014 from Woodbridge, VA

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