First of all, it is never a good idea to borrow from your 401(k) as it is designed as a retirement savings vehicle with contributions reducing current taxes and earnings growing tax deferred. You should exhaust all other resources first. If you do need to borrow from the 401(k) you can borrow the lesser of 50% of your vested balance up to a maximum of $50,000. Repayment of the loan is done through salary deferrals and can be done for various periods of time, usually not more than 5 years unless it is for the purchase of your home. The re-payments are with after-tax dollars and a low interest rate is also imposed. You will need to check your summary plan description to find out what loan fees will also be imposed. If you fail to make your payments the loan will go into default and will be taxed as ordinary income along with any early withdrawal penalties that may be imposed.
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The government sets the limits on how much you can borrow. Generally, you’re allowed to borrow no more than 50 percent of your account value up to $50,000 maximum. However, government rules theoretically permit borrowing 100 percent of an account up to $10,000. But most plans don’t allow this; they limit all loans to 50 percent of the account value for the sake of simplicity. Some plans also impose a minimum loan amount because administering a loan for only a few bucks isn’t worth the hassle. Check out your summary plan description, or talk to your benefits office or 401(k) plan provider to get details for your specific 401(k).
Many plans allow for participants to borrow money from their accounts. When you do you are obligated to repay the borrowed funds and interest. Also most plans allow participants to take hardship withdrawals for certain situations such as medical expenses, purchase of a primary residence or college tuition.
Loans: The plan does not have to offer the ability for participants to borrow against their account all though many do. If allowed, loans must be made available on a nondiscriminatory basis. A reasonable rate of interest is charged to borrowers. Loans must be adequately secured and paid back with in 5 years, except for loans used to purchase a personal primary residence. These loans can be extended up to 30 years. The amount of a loan may not exceed the lesser of $50,000 or one-half of the present value of the participant's vested balance. However if borrowing $10,000 or less the plan may allow for this even if it is more than 50% of the participant's vested balance. Please remember there must be enough vested balance to do so. Often payroll deductions to repay the loan are immediately set up to start paying back the loan and interest right away.
Hardship Withdrawals: The amount of a hardship withdrawal generally cannot exceed the employee's total elective contributions as of the date of the distribution minus any previous hardship withdrawals if taken. To be able to take this withdrawal the participant must be able to prove an immediate and heavy financial need.