Home Equity Mortgage

What Happens When You Borrow From Your 401K

What You Need to Know Before Borrowing from Your 401(k) Financial setbacks may have you tempted to borrow money from your 401(k), especially because banks and other lenders have made it harder for you to borrow money by tightening up their lending standards.

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The law prevents you from cashing out a 401k until you reach the 401k withdrawal age of 59.5 years old, with limited exceptions. A 401k withdrawal often comes with a 10 percent penalty on top of taxes. Most 401k plans allow borrowing from a 401k by taking out loans under the Internal Revenue Service’s 401k loan rules.

Thinking about a 401k loan? A 401k is meant to fund retirement, but you can withdraw money from it earlier. There can be negative consequences if you borrow from your 401k but they are not as dire as we have been led to believe. Using the money to make or save money or to pay off high-interest debt can pay off.

Most 401(k) plans allow you to borrow up to 50% of your vested funds for up to five years, at low interest rates, and your own account receives the interest back.

Frankly, you’re behind on retirement savings and not having a 401k to contribute to at the new employer means you’ll have to save aggressively in your Roth IRA and in an outside account that doesn’t have the tax-advantaged growth that a 401k would offer. But get your 401k loan paid back, max out your Roth, pay off whatever borrowing needs done.

Borrowing from your 401(k) can be financially smarter than taking out a cripplingly high-interest title loan, pawn or ‘payday’ loan or even a more reasonable personal loan. It will cost you less.

Although borrowing from your 401(k) is not ideal, emergencies happen. And if you’re low on savings, can’t get a traditional loan, or would end up paying way too much in interest with a traditional.

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Many 401(k)s offer loans, but it’s not a requirement. Your summary plan description tells you the loan availability of your specific plan. Usually, you can borrow up to 50 percent of your vested account balance to a limit of $50,000. However, your plan may have restrictions on the reasons you can borrow the funds, including paying for the education of you, your spouse or children, avoiding.

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