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Is it possible to borrow money from my 401K and pay it back monthly over time?

Jan 14, 2015 by Robert from Marysville, OH in  |  Flag
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2 votes

Yes. Some plans will auto deduct from your payroll, but many will set up a link with your checking account to draw the funds monthly.

Please be careful of two things: First, the interest you are paying into the plan is after tax dollars into a pre-tax vehicle. This means if you are paying 1000 in interest over a 5 year period, that is money you have already paid taxes on that is going back into a pre-tax account...which will grow tax deferred, but will again be taxed when you take it out. Secondly, if/when you leave your job, any loan becomes immediately due in full, or you can pay the 10% penalty and income tax on the balance.

There are better places to borrow from, but it is good source if you can pay it back quickly.

Comment   |  Flag   |  Jan 14, 2015 from Manhattan, NY

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Yes, call your 401(k) Plan Administrator service contact noumber found on your statement.

Comment   |  Flag   |  Jan 14, 2015 from Canton, GA

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You need to find out from your Plan Administrator or HR Department if your plan actually allows policy loans.

Also, something to keep in mind is that if you take out a loan, and then leave your employer for ANY reasons, the loan then becomes fully due immediately.

Comment   |  Flag   |  Jan 14, 2015 from Mystic, CT

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Robert, A 401k loan is what you are describing. Generally they will make you pay it back every pay period, not monthly. Your HR department will have a lot of information on a 401k loan so that is the best place to start. Generally the interest rate is around Prime and you normally get 5 years to pay the money back. If you leave before the loan is paid in full, it will count as if you took money out of your 401k, fees and taxes will apply at this point.

Good luck- Tim

Comment   |  Flag   |  Jan 14, 2015 from Summerville, SC

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First let me say, don’t do it unless absolutely necessary.

But now that I’ve said that, It depends on a few factors. not all 401k plans allow loans in their rules; yours must allow them in order for you to take a loan. Also, you need to be currently working at the company where your 401k is to apply for that loan. But this can be a bad deal regardless.

Let’s put aside that this money is there for your retirement. I assume you are looking into this in an emergency context. Other reasons it can be bad include that assuming it is a traditional 401k, you would have originally contributed pre tax dollars. You will be now paying back that loan with after tax dollars. In other words, if you hypothetically took $1,000 out, you may have to earn around , $1,100 -$1,200 depending on your tax bracket which would then be subject to income and payroll tax deductions to net the $1,000 to put back in.

Also, if you were to lose your job or leave your work while you still had a balance on the loan, you would have a limited time to pay it all back, otherwise the balance you had outstanding would be subject to income taxes, and if you were younger than 59 ½ it would incur an additional 10% penalty.

So, if you must do it, just know that there may be consequences, and tread those waters carefully.

Comment   |  Flag   |  Jan 14, 2015 from Malvern, PA

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A loan from a 401(k) account should only be taken when all other sources of borrowing are unavailable. 401(k)'s are a retirement vehicle and should not be considered as a personal bank. Before you go to human resources, find your copy of the Summary Plan document (SPD) that you should have been given when you enrolled in the plan. That document should tell you if loans from the plan are available, and if they are, under what circumstances you can ask for a plan loan. The three most often included allowances are to pay large, unexpected medical bills, pay for college or graduate school, or prevent foreclosure of your primary residence. I've seen plans that include only these situations; I've seen more liberal circumstances permitted. If you can't locate your SPD, you now have two reasons to call human resources. One to get an SPD copy and, two, to inquire about the loan provisions in your plan.

Comment   |  Flag   |  Jan 15, 2015

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yes, that is generally how a 401k loan payback works, through automatic salary reduction each paycheck.

Comment   |  Flag   |  Jan 14, 2015 from Manhattan, NY

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