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How can i find out how much i can borrow from my 401k??

Apr 04, 2015 by Phillip in  |  Flag
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John Essigman Level 17

Hi Phillip

Every plan is different and is governed by the plan document. You can get a copy from your benefits administrator, your H/R department, and/or the custodian. Most plans allow you to borrow up to 50% of the amount in your account up to a maximum of $50k. Some plans allow multiple loans, however, the total that can be borrowed cannot exceed these limits across all loans. Generally speaking the APR will be about 1% over prime rate and must be paid through payroll deductions.

You may not be able to borrow from your 401(k) if you are no longer employed by the company sponsoring the plan. The loan must be paid back in-full within 5 years and usually within 60 days of leaving your employer.

There are a host of other rules and things to consider… suggest you discuss your options with a fee-only advisor.

Warmest regards John Essigman www.bluecreek.net

Comment   |  Flag   |  Apr 06, 2015 from Cleveland, GA

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Steve Casull Level 13

Phillip, I could ask pertinent questions like, "how old are you" and provide various scenarios here to answer your question, but that wouldn't be efficient. The quick response is, call your benefits officer at your employer, usually in the Human Resources department, and ask them. That advice, however, seems hollow. I wouldn't be good at what I do if I didn't ask questions about why you need the money? Depending on your needs, maybe there are other better, less expensive alternatives. I say less expensive because, although there may not be an actual fee for removing some of your 401K, there would be a reduction in the amount of money you have invested, thus reducing possible gains, in a currently upward market. You only have so much time to build a retirement portfolio.
Maybe you are renting, and have found a great deal on a house you'd like to take advantage of. Then I would respectfully offer my blessing. Four main 'monetary' reasons support my thinking; Housing prices will go up which increase your investment, you need to live somewhere, Interest rates are low, and I'll take buying over Renting any day. Not only does buying over renting make money sense, but it gives a person pride, and personal self worth, and gratification. These are aspects many Financial Advisors over look, but are extremely important.

1 Comment   |  Flag   |  Apr 06, 2015 from South Jordan, UT
Colin

Between your comment & Gary's comment, I completely agree. While I understand the intent of the Q&A is to actually address a person's question to a solution, I wish more advisors challenged the question writer about the purposes of scenarios like these. Too many people treat their 401k (or IRA) as a piggy bank to raid. Are they raiding it for good reasons (of which I would say they are very few & far between) or to fund an unnecessary luxury item (whether it be a possession or a trip, etc). All I can say to Phillip is withdrawing from your 401k should only be done as a last resort measure.

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Flag |  Apr 07, 2015 near Oak Creek, WI

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Gary Ray Duell Level 18

I would first deal with the question, why do you want to borrow from your 401(k)? This is usually a bad idea and should be tempered by the opportunity costs and risks. You should meet with an expert who you trust to reveal sufficient information to give you a holistic view on the impact of this action. Your age, budget, time horizon, 401(k) custodial provisions, purpose of the loan, etc . all need to be explicit.

Comment   |  Flag   |  Apr 06, 2015

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Phillip,

Your human resources department and the plan administrator will be able to walk you through this process. They should be able to provide a website and log in to your plan's website as well. Here you should be able to model a loan with the amounts available, payback period, and payment amounts.

Most plans allow you to borrow up to 50% of the amount in your account up to a maximum of $50,000. Some plans allow multiple loans, as many as three, however, the total that can be borrowed cannot exceed these limits across all loans. The current interest rate that I am seeing on my plans is 4.25%

If you are going to utilize a loan, I usually suggest to ask for the minimum amount that you need. Do not borrow more just because it is an easy process. Please weigh the pros and cons before you proceed.

Comment   |  Flag   |  Apr 07, 2015 from Lititz, PA

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If I were your dad, I'd say, "$0." Borrowing from a 401k hurts your retirement savings and few people have money to spare there. Most companies would do their employees a favor by prohibiting loans and some do.

The three things people do most to hurt themselves financially are 1) buying too much house on too long a mortgage, 2) buying and selling their cars too early and paying hundreds of dollars a month on car payments, 3) spending their retirement accounts when they get a check upon leaving a company or want to borrow for something.

That may sound hard-nosed, but it's the truth. Debt is your enemy, not your friend.

View all 8 Comments   |  Flag   |  Apr 09, 2015 from Charlotte, NC
David L. Hoshour AIF®

The difference in monthly payment between a 30 year and 15 year mortgage is only about 15%. And in my example, I said they should buy 15% less house so the payments would be equal to a 30-year on the other house.

Flag |  Apr 09, 2015 near Charlotte, NC
David L. Hoshour AIF®

The biggest problem is that after 40+ years of runaway consumerism and increasing acceptance of debt people have too much house and too much in car payments. Most of us Baby Boomers were raised, 3 or 4 kids at a time, in a 1,200 sq ft house, the average house size in 1960. Now, people are buying double the house size (2,500+ on average) as their parents and having half as many kids. And, they are much more prone to have large car payments and sell the cars and take on new payments when they get to 100K miles. I drive my Hondas and Toyotas well over 200K+ and don't buy them with less than 60K. Plus, they're paying for all kids of classes for their kids whereas we played on our own and came out quite well. They are lots of other things now that people have taken to seeing as minimum lifestyle issues that are not. Those are some of many reasons they're drowning in debt and don't have any savings for when "crap happens" so they have to put the repair or whatever on credit cards and deeper in debt they go.

Flag |  Apr 09, 2015 near Charlotte, NC

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