- The IRS allows you to borrow up to $50,000 from your 401k, not exceeding 50 percent of your vested balance. The vested balance is the money you own in the account; certain employer contributions may not be 100 percent yours immediately and are thus not vested. Plan providers may reduce this amount. The loan is a five year loan. Failure to repay the loan within the five years results in a distribution of the remaining loan value.
- Your plan administrator has the forms to take a loan out against your 401k funds. There is no credit check; qualification is purely based on the amount in the IRA and your employment status. You must still be employed with the company to take the loan. Once you sign and submit the paperwork, a check is sent to you to deposit into a personal checking account and spend as you wish.
- The reason you must be employed with the company to obtain the loan is repayments are made through payroll deductions. If you lose your job or leave for any reason with a loan balance outstanding, you must pay the loan in full or accept the balance as a distribution. Payments include principal and interest. The interest is not deductible since you are repaying yourself into a tax-qualified plan.
- Interest rates are set by the plan provider. Generally, the interest is much lower than commercial loan rates; rates might be 2 percent over the national prime rate. While some of the interest rate might be applied to fees and administrating the loan, the majority of it is paid back into your 401k and is allowed to grow under the tax-shelter as well. The loan gives you the ability to preserve the tax-structure and growth rather than take an early distribution and pay taxes and possible penalties for early withdrawal.
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