If you don't repay the loan, including interest, according to the loan's terms, any unpaid amounts become a plan distribution to you. Your plan may even require you to repay the loan in full if you leave your job.
If you don't want to invest in your 401(k), here's how to opt out or stop your contributions. If you're not interested in making paycheck contributions (known as deferrals) into your Guideline 401(k) or you'd like to pause them temporarily, you can opt out at any time by logging into your account.
Repayment periods
Generally, the employee must repay a plan loan within five years and must make payments at least quarterly. The law provides an exception to the 5-year requirement if the employee uses the loan to purchase a primary residence.
Rules of taking out a 401(k) loan are as follows:
There is a 12 month "look back" period, which means you can borrow up to 50% of your total vested balance of all accounts you owned for the last 12 months, reduced by the highest outstanding balance over this look back period.
The maximum amount that the plan can permit as a loan is (1) the greater of $10,000 or 50% of your vested account balance, or (2) $50,000, whichever is less. For example, if a participant has an account balance of $40,000, the maximum amount that he or she can borrow from the account is $20,000.
The timing requirement requires that the employer must provide notice within a reasonable period before each plan year. This requirement is deemed to be satisfied if the notice is provided to each eligible employee at least 30 days and not more than 90 days before the beginning of each plan year.
Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.
Can you pay off a 401(k) loan early? Yes, loans from a 401(k) plan can be repaid early with no prepayment penalty. Many plans offer the option of repaying loans through regular payroll deductions, which can be increased to pay off the loan sooner than the five-year requirement.
For a 401(k) loan, any interest charged on the outstanding loan balance is repaid by the participant into the participant's own 401(k) account; technically, this is a transfer from one of your pockets to another, not a borrowing expense or loss.
401(k) retirement plans may be “frozen” by a company's management, temporarily halting new contributions and withdrawals. A freeze can occur in the case of a corporate restructuring such as a merger or if your company changes 401(k) plan providers.
Typically, you can't close an employer-sponsored 401k while you're still working there. You could elect to suspend payroll deductions but would lose the pre-tax benefits and any employer matches. In some cases, if your employer allows, you can make an in-service withdrawal if you've reached the age of 59 ½.
If you have low-interest rate loans and expect higher returns on the investments in your 401(k), it may be a good strategy to contribute to your 401(k) while chipping away at your debt—making sure to prioritize paying off high-interest rate debt.
If you are out on a leave of absence, either without pay or when your pay is less than the amount of the loan payments due, you may request to have your loan payments suspended for up to 12 months.
A 401(k) loan lets you borrow from your retirement savings without the penalty, but you must repay it within five years with interest. You can withdraw from your 401(k) to pay off debt, but income tax and the 10% penalty may apply.
Another benefit: If you miss a payment or default on your loan from a 401(k), it won't impact your credit score because defaulted loans are not reported to credit bureaus. Cons: If you leave your current job, you might have to repay your loan in full in a very short time frame.
Although you generally have up to five years to repay a 401(k) loan, leaving your job (or losing it) before the loan is repaid may mean you have to pay back what you owe quickly. If you can't, the loan will go into default and the unpaid balance is considered a distribution (referred to as the loan offset amount).
After other borrowing options are ruled out, a 401(k) loan might be an acceptable choice for paying off high-interest debt or covering a necessary expense. But you'll need a disciplined financial plan to repay it on time and avoid penalties.
As a general rule, if you withdraw funds before age 59 ½, you'll trigger an IRS tax penalty of 10%. The good news is that there's a way to take your distributions a few years early without incurring this penalty. This is known as the rule of 55.
Dipping into a 401(k) or 403(b) before age 59 ½ usually results in a 10% penalty. For example, taking out $20,000 will cost you $2000.
Since Jan. 1, 2024, however, a new IRS rule allows retirement plan owners to withdraw up to $1,000 for unspecified personal or family emergency expenses, penalty-free, if their plan allows.
Roll over your 401(k) to a Roth IRA
You can roll Roth 401(k) contributions and earnings directly into a Roth IRA tax-free. Any additional contributions and earnings can grow tax-free. You are not required to take RMDs. You may have more investment choices than what was available in your former employer's 401(k).
Everyone has different financial needs, but here's a golden rule: Whatever percentage your employer is willing to match, try to take full advantage of it. Anything less, and you could be leaving money on the table. Additionally, if financially possible, you may want to max out your 401(k) year after year.
To make qualified distributions, it must be 5 years since the beginning of the tax year when the original account owner made the initial contribution, even if the new owner is 59½ or older.
What does the 4% rule do? It's intended to make sure you have a safe retirement withdrawal rate and don't outlive your savings in your final years. By pulling out only 4% of your total funds and allowing the rest of your investments to continue to grow, you can budget a safe withdrawal rate for 30 years or more.