How To Borrow Money From A 401K

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Millions of workers put money into their work sponsored 401(k) plan in the hopes of having an income when they retire. On their way to retirement, some people decide that they need to take money out of their 401(k) for various reasons. It sounds a little too easy, but it may be possible to borrow money from your 401(k) plan that you pay back over time.

<h3>What Is A 401(k) Loan?</h3>

It is estimated that nearly 90 percent of all 401(k) plans in the United States offer participants to take out loans. This is different from an IRA where loans are not allowed and any money you take out before age 59 1/2 is subject to a 10 percent IRS penalty. There is no penalty for taking out a 401(k) loan, but there is a process you have to follow.

<h3>The Rules Of A 401(k) Loan</h3>

All 401(k) loans in the United States are regulated by federal guidelines that can change from year to year. Before you take out your loan, it is important to check with your 401(k) administrator to see if the rules have changed. As of 2018, any employee is allowed to take out up to 50 percent of the balance in their 401(k) plan, and that money must be paid back within five years.

Some companies have rules about how vested an employee must be to take a loan, while others do not. A 401(k) loan has no interest, which makes it an appealing choice for many people. You pay back the loan through money taken out of each paycheck in pre-tax dollars. Because it is pre-tax dollars, a 401(k) loan is much less expensive than a standard loan.

<h3>How Do You Get A 401(k) Loan?</h3>

To get a 401(k) loan, you need to ask your retirement plan administrator at your company how the process works. Some companies require employees to fill out paper forms, while many employers have created a simple online process. The only way you can get denied a 401(k) loan is if you already have loans outstanding that prevent you from taking another loan. Many companies limit the number of 401(k) loans employees can have outstanding at one time. This is something you would need to discuss with your plan administrator.

<h3>Why A 401(k) Loan?</h3>

With no interest applied to the balance and an almost guaranteed approval, 401(k) loans are great for people with bad or no credit. They can also be handy for people who already have too much debt outstanding and cannot get approved for more funding.

After working for a few years with a company, most people have the beginnings of a good 401(k) retirement account going. With a 401(k) loan, you could send your child to college, buy a house or buy a car. It is your money and it is definitely worth looking into the different ways you can access that money when you need it.