What is a 401(k) loan?
A 401(k) loan is different from a loan you would normally take from the bank. It is a loan from your retirement account, so you are borrowing from yourself, using the funds you set aside for your future. Many—but not all—401(k) plans allow for loans, so check with your administrator.
You can take a 401(k) loan of up to 50% of your total vested account balance. To illustrate, if you have $2000 vested (meaning all yours) in your account, you can take a loan of $1,000 (50%). You can take a loan whenever you like, but only one is allowed at a time, so you must pay it off completely before borrowing from your 401(k) again.
The maximum loan amount is $50,000 in a 12-month period. The interest rate will be prime + 1%. Check the exact amount at the time you take the loan.
How are loan payments made?
Your company's plan will dictate how much time you have to repay the loan, but it will not be longer than 5 years. You can choose a shorter time period if you wish.
Payments will be removed from your paycheck and credited to your account. Additional loan payments can be made by logging in to your account and navigating to Menu > Account > Bank Accounts and adding your bank account information.
Loans can be paid off early.
If you are using the loan to purchase a primary residence, you may get a 30-year repayment window. Proof of purchase is required.
Loan money is removed from your account tax-free, but your payments are made with after-tax dollars.
What if I no longer work there?
If you're separated from work, you are typically required to pay the loan in full within 90 days. If the loan is not paid, and you are not of retirement age (59 1/2), the outstanding amount is considered income and will be taxed. You will receive an IRS form 1099 for the balance. If the loan is made from a Roth (post-tax) account, you may owe additional taxes.
A closed or defaulted 401(k) loan does not affect your credit or standing, but it can affect whether you are allowed to take another loan from that same 401(k) plan.