Can You Take a Loan From Your 401(k)?

If you’re in a situation where you need quick access to cash, borrowing a loan from your 401(k) may be an option. However, dipping into your retirement savings might not be the right decision for everyone. The ePlan Services team encourages our 401(k) participants to fully inform themselves before making any decisions regarding their retirement accounts.

This guide provides a breakdown of how 401(k) loans work and how to determine whether this is the right financial option for you.

What Is a 401(k) Loan?

When you take out a 401(k) loan, you’re borrowing money from your own 401(k) account. People might choose this option when making large purchases, such as a down payment on a home, or to find relief from immediate financial need.

According to the IRS, account holders can borrow up to $50,000 or 50% of their vested balance. Once you borrow the amount you need, you’ll pay yourself back in accordance with the loan’s terms.
Typically, borrowers have five years to pay back the loan and must make payments at least quarterly. Like other types of loans, 401(k) loans carry interest. Your 401(k) plan determines the interest rate of your loan.

How 401(k) Loans Work

You can take out a 401(k) loan through your plan provider’s website. Some providers may have tools that help you do so quickly and easily. You should also be able to read the loan terms.

How you’ll receive your loan will also vary by provider, so be sure to check with your plan administrator or retirement account provider. Some providers allow you to receive your loan with your next paycheck. Then, money will be deducted from your paychecks to pay the loan back.

ePlan Services makes it easy to request a 401(k) loan with our online loan tool. View loan instructions, set your payment schedule, and calculate your approximate payment. Contact our team to learn more.

What Are the Pros & Cons of 401(k) Loans?

There are many factors to weigh when considering a 401(k) loan. As with any financial decision, it’s worth speaking to an expert like a financial advisor while comparing your options, as every situation is unique.

Pros of 401(k) Loans

When might a 401(k) loan be for you? There may be several upsides to borrowing against your retirement account.

• Pay lower interest rates. 401(k) loans often have lower interest rates than other types of loans, such as personal loans. You’ll also pay the interest back to yourself, rather than to a financial institution.
• Avoid credit checks (possibly). Depending on your 401(k) provider, you may not need to complete a credit check to take out a 401(k) loan.
• Get your loan quickly. 401(k) loans are typically a convenient option. You may be able to quickly request the loan on your account provider’s website. Depending on your provider, you may receive the loan with your paycheck.

Cons of 401(k) Loans

There may also be some drawbacks to taking out a 401(k) loan.

• The money you withdraw won’t be growing. The funds in your 401(k) account are investments, so they generally compound and grow over time. However, the money you take out as a loan stops growing once it’s no longer in your 401(k) account. While you will eventually put that money back in, you may be slowing your retirement savings in the meantime.
• 401(k) loans aren’t guaranteed. Not all 401(k) providers offer 401(k) loans, nor will all providers allow you to borrow the amount that you need. Be sure to look into the loan terms prior to requesting a loan.
• You may end up with taxes and penalties. If you’re unable to pay your loan back within the repayment period, your loan will be defaulted and reclassified as a withdrawal. This means that the amount you still owe becomes taxable, and you’ll need to pay a 10% early-withdrawal penalty on that amount (if you’re under 59 ½ years old). You may also need to pay your loan back quickly if you lose or leave your job, or the loan will default.

The decision of whether to borrow against your 401(k) can be a difficult one. If you need access to emergency cash, it’s worth weighing your choices and seeking advice from a financial professional. If you ultimately decide to take out the loan, ePlan is here to provide a smooth process for accessing and paying back that money.

Have questions about your loan options? Contact our team today.

This content is for educational purposes only, is not intended to provide specific legal or financial advice, and should not be used as a substitute for the legal advice of a qualified attorney or financial professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.