FAQ - ANSWER

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.

Most of the time loans are only allowed for the following reasons: (1) to pay education expenses for yourself, spouse, or child; (2) to prevent eviction from your home; (3) to pay un-reimbursed medical expenses; or (4) to buy a first-time residence. You must pay the loan back over five years, although this can be extended for the first-time 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 your are not at least 59½ years of age, the 10% withdrawal penalty. A loan can’t be roll into an IRA.

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