Can You Take a 401k Loan?
1. Some 401k plans allow a withdrawal in the form of a 401k loan; some do not. You must check with your 401k plan administrator or 401k investment company to find out if your plan allows you to borrow against your account balance.
2. If you are no longer working for the company where your 401k plan is at, you may not take a 401k loan.
Do You Pay Tax On a 401k Loan?
3. At the time you take a 401k loan you pay no taxes on the amount received. If the loan is not repaid according the specific repayment terms than any remaining outstanding loan balance becomes taxable income to you, and if you are not yet 59 ½, a 10% penalty tax will also apply.
4. If you leave employment while you have an outstanding 401k loan and decide to roll over your 401k plan to a new plan or to an IRA, your remaining 401k loan is considered a distribution at that time and it will be taxed as ordinary income in that year, plus if you are not yet 59 ½, a penalty tax will be assessed in addition to your ordinary income taxes.
How Much Can You Borrow And How Do You Repay a 401k Loan?
5. If your 401k plan does allow loans, the most you will be able to borrow will be $50,000 or 50% of your vested account balance, whichever is less.
6. 401k loans are set up through automatic repayment from your paycheck. The longest repayment term usually allowed is five years.
7. The interest rate on your 401k loan is determined by the rules in your 401k plan. You pay the interest back into your own 401k account balance.
