Retirement Basics 401K Loans

Most 401(k) plans have a loan provision for the participant, although it is not a requirement. Whether or not your 401(k) plan has a loan provision depends on your employer and how the plan was set up. If your plan does offer a loan, the maximum that can be taken is 50% of the vested balance, capped at $50,000. While your 401K plan is designed to provide income in your retirement, sometimes life events leave us with nowhere else to turn. This loan provision can be that savior.

A 401K loan is easy to get, as no credit check is required. Terms are generally defined by the plan administrator, usually asking a lower than average interest rate. Loans must be repaid within 5 years using substantially equal payments, at least quarterly. These payments can be made directly out of the participant’s paycheck but on an after-tax basis. If the participant defaults on the loan, they are not only subject to the income taxes but also will be assessed the 10% excise tax as an early distribution.