To find out if you’re allowed to borrow from your 401(k) plan and under what circumstances, check with your plan’s administrator or read your summary plan description. Some employers allow 401(k) loans only in cases of financial hardship, but you may be able to borrow money to buy a car, to improve your home, or to use for other purposes.
Generally, obtaining a 401(k) loan is easy — there’s little paperwork, and there’s no credit check. The fees are limited, too — you may be charged a small processing fee, but that’s generally it.
No matter how much you have in your 401(k) plan, you probably won’t be able to borrow the entire sum. Generally, you can’t borrow more than $50,000 or one-half of your vested plan benefits, whichever is less. (An exception applies if your account value is less than $20,000; in this case, you may be able to borrow up to $10,000, even if this is your entire balance.) Your plan may also allow you to borrow up to $100,000 (or 100% of your vested plan benefits, whichever is less) if used for recovery from a federally-declared disaster.
Typically, you have to repay money you’ve borrowed from your 401(k) within five years by making regular payments of principal and interest at least quarterly, often through payroll deduction. However, if you use the funds to purchase a primary residence, you may have a much longer period of time to repay the loan.
Make sure you follow to the letter the repayment requirements for your loan. If you don’t repay the loan as required, the money you borrowed will be considered a taxable distribution. If you’re under age 59½, you’ll owe a 10% federal penalty tax, as well as regular income tax, on the outstanding loan balance (other than the portion that represents any after-tax or Roth contributions you’ve made to the plan).
Your 401(k) plan may have a provision that allows you to withdraw money from the plan while you’re still employed if you can demonstrate “heavy and immediate” financial need, have exhausted all other available distribution options (and, possibly, loan options) from your retirement plans, and have no other resources you can use to meet that need (e.g., you can’t borrow from a commercial lender and you have no other available savings). It’s up to your employer to determine which financial needs qualify. Many employers allow hardship withdrawals only for the following reasons:
Note: You may also be allowed to withdraw funds to pay income tax and/or penalties on the hardship withdrawal itself, if these are due.
Your employer may require that you certify your need for a hardship withdrawal in writing. and certify that you have experienced .
Depending on plan rules, you may be able to withdraw your contributions, safe harbor employer contributions, and your employer’s qualified nonelective and matching contributions, as well as earnings on those contributions. Check with your plan administrator for more information on the rules that apply to withdrawals from your 401(k) plan.
The option to take a hardship withdrawal can come in very handy if you really need money and you have no other assets to draw on, and your plan does not allow loans (or if you can’t afford to make loan payments).
If you are a reservist called to active duty after September 11, 2001, special rules may apply to you.
1 Your employer may offer penalty-free qualified disaster recovery distributions (QDRDs) to retirement plan participants affected by federally-declared disasters, up to a maximum of $22,000 per disaster.
2The entire 401(k) plan balance may be eligible for penalty-free distributions.
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