401k Loan Rules

Retirement plans are not required to allow loans but 401k loans are common. When borrowing from your 401k, you should know the 401k loan rules. Each 401k plan has different specific 401k loan rules. However, most 401k loans work in a similar way. Below are common 401k loan rules.

There are many reasons why knowing 401k loan rules is handy. First of all you can obtain 401k loans while in bankruptcy. There is a new bankruptcy law and 401k loan repayments that you should check out. You can also get a 401k loan to purchase a home. Some people choose between home equity loan vs. 401k loan but which should you choose depends on your specific situation.

While the 401k loan rules allow you to borrow against funds in your 401k account, other types of retirement accounts such as IRA accounts do not allow borrowing of funds. For IRAs, you can borrow for up to 60 days without being penalized but no longer.

What are the 401k loan rules?

What are the 401k loan rules on how much I can borrow?

Here is a brief highlights of 401k loan rules. First of all you can withdraw from  your 401k account up to half of your balance or to a certain limit such as $50,000 set by each 401k plan. How much you can borrow from your 401k account depends on how much you have contributed and how much contributions are vested.

401k loan rules on repayment

Usually the 401k loan rules will allow you to borrow and pay back the loan over 5 years or so. Some 401k plans allow a longer period of time for repayment. It depends on each 401k plan.

What is the 401k loan rules on interest rates?

Again, the specific interest rate the 401k loan charges depends on the specific plan. However, most 401k loan rules say that the loan is charged at prime rate plus one or another percentage for interest. The interest rate you pay for borrowing from your own 401k account is pretty low compared to a credit card interest rate or other types of loan. This is because you are borrowing money from yourself (effectively) since it is your 401k account. That's why many people prefer to borrow 401k loan vs. home equity loan. Even a low rate home equity loan can have higher interest rate than your 401k loan.

What if I default on the repayment of my 401k loans?

Effectively, if you fail to repay your 401k loans, you are out of the money, not the employer. So, you will owe taxes and penalties to the IRS and lose out of future tax deferred savings. Effectively, you are at a worse place to default on the 401k loans but the lender is really you, not he employer.