If you're looking for a source of funds and don't want to pay interest to a bank, your 401(k) plan might be a good option. However, the Internal Revenue Service sets maximums on how much you can borrow. Also, employers have the option to disallow 401(k) loans altogether -- in which case your limit is zero -- or to require your spouse to sign off on any loan. If so and your spouse says no, your limit is also zero.
Vested Account Balance
The amounts you can borrow from your 401(k) plan are figured on your vested account balance, which is the money in the plan that you would get to keep if you left your job. Your own contributions and earnings are always vested, but your employer's matching contributions might not be. Employers may require you to work for them a certain number of years before you get to keep their contributions to your account, and these unvested matches are not included in figuring your 401(k) loan limit.
Generally, you can borrow the smaller of $50,000 or 50 percent of your vested account balance from your 401(k) plan. For example, if your vested account balance is $500,000, you can borrow up to $50,000. However, if your vested account balance is only $60,000, your maximum loan is $30,000. This limit applies cumulatively to all your loans -- you can't take out two $50,000 loans at a time even if your balance is large enough.
Recently Repaid Loans
Loans repaid within the past year count toward your limit. For example, say you have a $500,000 vested balance, so your loan limit would normally be $50,000. But if you had a loan outstanding with a $35,000 balance one year ago, your loan limit for a new loan is $15,000, even if you repaid the prior loan in full six months ago.
Small Account Balances
If your vested 401(k) plan balance is less than $20,000, you can borrow up to 50 percent of your account balance or up to $10,000, whichever is larger. However, you can't borrow more than your vested account balance. For example, say you've got $15,000 as your vested account balance. You can borrow up to $10,000 rather than $7,500. If your account balance is $8,000, you can borrow up to $8,000.
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