Can I take a loan from my 401(k)?

  1. Only if the plan allows for loans. Many employers feel strongly that plan money is for retirement and procedures should be in place to help you retain your plan balances for that express purpose.
  2. Some plans restrict the number of loans you can have at any given time. So if you have an existing loan, you might have to pay that loan off first before taking a new loan.
  3. Some plans restrict loans to certain “source” of money in the plan, for instance, 401(k) deferrals. Thus you might have a profit sharing contribution but no deferrals., and thus cannot take a loan.

Can I take a loan out for any reason?

  1. Some plans allow you to take a loan for any purpose—even imprudent ones!
  2. Some plans restrict your ability to borrow money from the plan only if you have a financial hardship. Most plans use the IRS’ definition of financial hardship to include:
    1. Funds to avoid foreclosure or eviction
    2. Medical expenses not covered by insurance
    3. Funeral expenses
    4. Home purchase
    5. Post-secondary education expenses

What is the maximum loan I can take?

  1. The lesser of $50,000 or 50% of your vested account balance.
  2. The amount you can borrow may be reduced by the maximum outstanding loan balance you have had within the prior 12 months.
  3. Most plans impose a minimum loan amount, for example, $1,000.

For how long can I borrow money?

  1. As a general rule, up to 60 months.
  2. Some plans allow longer terms for loans used to purchase your primary residence.
  3. Almost all loans are due upon termination of employment even if prior to the original term of the loan.

Is there a cost to take out a loan?

  1. The plan’s recordkeeper generally imposes a loan fee and annual servicing costs.
  2. You will be charged interest on your loan.
    1. Interest is generally 1 or 2 percentage points greater that the Prime Rate at the time of the loan.

Can I refinance my loan for a lower interest rate?

Only if a Plan’s Loan Policy Permits it.

Can I deduct the interest on a 401(k) loan?

No, even if the loan is taken out to help you purchase your primary residence.

Who gets the interest I pay on my loan?

  1. Your plan account is credited the interest you pay.
  2. In essence, one of your plan’s investments is a loan you have made to yourself.