Have you ever come to a crossroads in life where you needed some extra funds? Maybe you asked a friend or family member for a short-term loan, opened a home equity line of credit, or – instead of borrowing – took on another job to increase your income.
One other option that some may not know about is the ability to borrow money from your 401(k) retirement account.
While not every 401(k) plan allows lending, the ones that do generally have very specific rules about the amount you can borrow – and for how long.
For most plans, the most you can borrow is $50,000 if you have invested $100,000 or more in the account. If the balance on the account is less than $100,000, then you are allowed to take up to 50 percent of the amount invested. For example, if you have $80,000 in your 401(k), then the retirement account enables you to borrow up to $40,000.
Expectations of Repaying the 401(k) Loan
When you withdraw money from this type of retirement account, you are generally expected to pay it back within five years. There are some exceptions, such as if you are borrowing the money to purchase a main home.
The benefits of this type of loan are that you are not taxed on the withdrawal unless you fail to pay back the money in the time specified. You are also sometimes paying the money back interest-free, so unlike a loan from your bank or credit card issuer that may assess a hefty interest rate, you essentially pay back exactly the same amount as you borrowed (again, as long as it’s paid within the timeframe). (Please note: if a loan is not paid back it is considered a taxable withdrawal and may incur a 10% early withdrawal penalty if under 59 1/2. )
Knowing When to Borrow
Of course, just because you can borrow the money does not always mean it is in the best interest of your overall financial plan. Before you take out a loan against a 401(k) retirement account, be sure you speak with your financial advisor about how it may affect your retirement savings or other big picture plans.