What are the general rules regarding loans from a 401k?
Answer: The rules governing 401k plans allow plans to provide loans, but do not mandate that an employer make it a plan feature. Even so, loans are a feature of most 401k plans. Check with your Human Resources department if you're not sure if your plan allows loans. If offered, your employer must adhere to some very strict and detailed guidelines on making and administering them.
A few of the most common reasons for a loan include, but are not limited to: pay college education expenses for a child, pay un-reimbursed medical expenses, or for a down payment on a home purchase. You must pay the loan back over five years, although this can be extended for a home purchase.
Usually you are allowed to borrow up to 50% of your vested account balance to a maximum of $50,000 (set by law). Because of the cost, many plans will also set a minimum amount and restrict the number of loans you can have outstanding at any one time.
If loans are available in your plan, they are pretty easy to get. No credit check is required. Contact your Human Resources department on how to apply. Loan payments will generally be deducted from your payroll checks and, if married, you may need your spouse to consent to the loan.
Funds obtains from a loan are not subject to income tax or the 10% early withdrawal penalty. If you should terminate your employment, often any unpaid loan will be distributed to you. This distribution will be subject to income tax and, if you are not at least 59½ years of age, the 10% withdrawal penalty. A loan can't be roll into an IRA.
This is for educational purposes only. The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.
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