Retirement savings are among the largest assets many people have. If you find yourself in need of cash for an emergency, borrowing from your 401(k) allows you to tap into this asset and pay yourself back. Most 401(k) plans have provisions for borrowing from your account and repaying the loan. Contact the Human Resources department of your employer, or your plan administrator, to learn your plan’s rules for borrowing from your 401(k).
Accessing the money in your 401(k) doesn’t involve a credit check, jumping through hoops for a lender, or a long wait for approval. The process is usually simple – fill out a few forms, agree to payroll withdrawal to repay the loan, and the money is yours. You don’t owe taxes on the money as long as you repay it. You can take out more than one loan as long as the loans are more than one year apart, and you aren’t behind on payments to the first loan when you take the second loan.
The money you withdraw from your 401(k) doesn’t grow with your other investments in the plan while you have it out. Many plans won’t allow you to make additional contributions to your 401(k) as long as you have an outstanding loan. If you quit or lose your job, you must repay the money you borrowed right away. Though you pay interest to yourself on the 401(k) loan, this interest isn’t tax deductible, the way interest from a Home Equity loan would be.
Each plan sets its own qualifications for borrowing from your 401(k). You can only borrow a maximum of 50 percent of your vested interest in the plan, up to $50,000. You must repay your loan within five years, though some plans allow a longer repayment time if you use the money to buy a home. If you don’t repay the loan on time, you’ll owe taxes on the amount you borrowed, and could be subject to a 10 percent tax penalty if you’re younger than 59 ½ when you take out the loan.
You might have to pay loan origination fees and/or processing fees and even monthly fees in order to take a 401(k) loan. If you don’t feel your job situation is stable, be sure you can repay the loan in full if you suddenly lose your job. If you die and leave an outstanding loan balance, the balance is considered a distribution and your heirs will owe income tax on the loan balance, but they won’t have to repay the loan.
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