A 401(k) loan is limited to the lesser of $50,000 or 50% of your vested balance. You'll typically need to repay the loan within five years. If you leave your job, the loan must be repaid by Tax Day.
The maximum amount a participant may borrow from his or her plan is 50% of his or her vested account balance or $50,000, whichever is less. An exception to this limit is if 50% of the vested account balance is less than $10,000: in such case, the participant may borrow up to $10,000.
As long as a plan allows it, participants generally can borrow from their 401(k) for any reason that they deem necessary. Some plans may only allow loans for specific reasons, so be sure to check your plan's rules before trying to borrow.
401(k) loans
Remember, you'll have to pay that borrowed money back, plus interest, within 5 years of taking your loan, in most cases. Your plan's rules will also set a maximum number of loans you may have outstanding from your plan.
The IRS dictates you can withdraw funds from your 401(k) account without penalty only after you reach age 59½, become permanently disabled, or are otherwise unable to work.
If you have a high-interest debt, such as from a credit card with a big balance, you may get a much lower interest rate on a 401(k) loan. If you have upcoming debt payments and no other alternatives for paying them, borrowing from your 401(k) can reduce fees and penalties.
A 401(k) hardship withdrawal is a withdrawal from a 401(k) for an "immediate and heavy financial need."1 It is an authorized withdrawal—meaning the IRS can waive penalties—but it does not relieve you of your tax responsibilities.
Other reasons for a denial include exceeding your loan limit, your plan allows for only one loan at a time, or your reason for seeking the loan doesn't meet plan criteria (i.e., you want to use the funds to finance your next vacation).
A 401(k) loan is limited to the lesser of $50,000 or 50% of your vested balance. You'll typically need to repay the loan within five years. If you leave your job, the loan must be repaid by Tax Day.
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.
Although your credit doesn't affect your ability to get a 401(k) loan, your plan administrator could deny your loan request for other reasons. For example, it might not approve you for a loan if you have an outstanding 401(k) loan.
As much as you may need the money now, by taking a distribution or borrowing from your retirement funds, you're interrupting the potential for the funds in your 401(k) plan account to grow through tax-deferred compounding — and that could make it more difficult for you to reach your retirement goals, says Feist.
Money withdrawn from your 401(k) account will not be earning interest, so your retirement savings might not grow at the same rate. Using a personal loan to consolidate debt may save you money in interest on higher-rate debts which could help you manage your budget effectively or add to your savings.
Moreover, a 401(k) loan won't affect your credit at all — even if you default on it. Low interest rates. You'll pay a modest interest rate and this money goes straight into your retirement account.
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.
The administrator will likely require you to provide evidence of the hardship, such as medical bills or a notice of eviction.
Generally speaking, there are 2 types of 401(k) loans: a general purpose loan and a residential loan.
Acceptable Documentation
Lost Employment. • Unemployment Compensation Statement. (Note: this satisfies the proof of income requirement as well.) • Termination/Furlough letter from Employer. • Pay stub from previous employer with.
Lying to get a 401(k) hardship withdrawal can result in fines, tax penalties, job loss and even jail time. The total cost of borrowing from your retirement to pay off debt is not worth it.
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.
A 401(k) loan is generally not a good idea, for those who can avoid it. However, borrowing against retirement savings may be prudent for those who need a short-term bridge loan when, for example, buying a house.
Pros. Lower interest rate: The interest rate on a 401(k) loan is lower compared to other retail lending options. Typically, it's the prime rate plus 1% to 2%. As of November 2023, the prime rate is 8.50%, which makes a 401(k) loan about 9.50% to 10.50% APR, depending on your plan's administrator.
“But it wouldn't be recommended to take it out to satisfy non-essential expenses, like credit cards or other loans,” Nitzsche says. Consider also the opportunity cost of withdrawing your retirement savings during a market decline.
However, there may come a time when you need money and have no choice but to pull funds from your 401(k). Two viable options include 401(k) loans and hardship withdrawals. A 401(k) loan is generally more attainable than a hardship withdrawal, but the latter can come in handy during times of financial strife.