We always recommend that you explore all other options before taking a loan from your 401(k) plan. It is designed for retirement and you will be reducing the compounding effect of the assets over time. If you decide to take a loan the first thing you will need to do is make sure that your company’s 401(k) plan allows for loans. If they do, you will need to initiate the request through your employer. You will be provided with a repayment amortization schedule, interest charges shown and a promissory note that you will have to sign. Repayment of the loan is done through payroll deductions with “after tax” dollars and there will probably be a fee associated to process the loan. The Summary Plan Description for the 401(k) plan will provide you with all of the details. If you default on the loan it will become a distributable event and subject to taxes and potential 10% early withdrawal penalty if you are younger than 59 ½ years old. You can borrow the lesser of 50% of your vested balance up to $50,000.
Thank you for your question.
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Hi David, agree with Billy. Your plan must allow for loans. If loans are permitted, you'll find that typically, the minimum loan amount is $1000, and the maximum loan is 50% of your vested balance, up to a dollar maximum of $50,000. In most cases, loans are repaid through payroll deduction, though a few providers offer the option of payment through direct debit or ACH on your checking account. The maximum length of a loan is five years, meaning the loan must be paid back within five years. If you leave your employer before the loan is repaid, you either repay the loan on termination, or it becomes a taxable distribution, subject to income taxation and, if you are younger than 59.5, that glorious 10% penalty. The interest rate is determined by the plan document, though this detail should be in the Summary Plan Description, or SPD, which you can download or request through HR at your place of employment. Contact HR or benefits, or the plan vendor if they refer you to them, and tell them you want loan application docs. With some plans and vendors, all loan details can be taken care of online. Hope this helps.
First and foremost, your 401(k) must allow for loans. Beyond that, most loans must be paid back within a 5 yr period. You can generally pay them off early with funds from your payroll or from outside your payroll. The interest rate that you pay (usually you get the benefit of the interest payment) is also determined by the plan. If you leave the company where you have the 401(k), then you will either need to pay it off, or it could be deemed, meaning it will be counted as a taxable distribution. I'm sure there are other rules, but those are the basics.