How to Borrow Against a 401(k) to Pay Down a Mortgage

Taking out a 401(k) loan to pay down your mortgage could hamper your retirement savings growth. Images

Taking a loan from your 401(k) plan may sound like a great idea — no credit check, competitive interest rates and the interest you pay goes back in your account — but it's not all roses. When you borrow from your 401(k) plan, the interest rate you pay is usually lower than what the money would have earned in the plan, so you're missing out on the investment gains. Also, repayments on the 401(k) plan aren't tax deductible while your mortgage payment likely is. In addition, if you leave your job, you may have to repay the loan immediately. If you don't repay the loan, the Internal Revenue Service treats it as if you took a distribution, which counts as taxable income and, if you're not 59 1/2 years old, is hit with an additional 10 percent tax penalty.

Step 1

Calculate the amount you're allowed to borrow from your 401(k) plan. Loans cannot exceed the smaller of 50 percent of your vested account balance or $50,000. Suppose your vested account balance is $90,000. Then your maximum loan would be $45,000.

Step 2

Complete a 401(k) loan request form, available from your 401(k) plan administrator. The loan request form requires your name, account information and the amount that you want to borrow from your plan. Your plan may also require your spouse's consent, so check with your plan administrator.

Step 3

Use the proceeds of the loan to pay down your mortgage. You do not have to keep receipts to prove the money was used for paying down your mortgage because it does not affect the terms of the 401(k) loan.

Step 4

Repay the loan according to the loan terms. Usually, your employer simply takes your repayments out of your paycheck and you repay the loan over up to five years. However, if you leave your job, you usually must repay the loan immediately.

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About the Author

Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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