Although it’s never a good idea to tap into your future retirement savings for something unnecessary, if there is a true need it’s comforting to know that you can do so.
Loans against a 401k have advantages not the least of which is that you do have access regardless of your credit score. The loan will not appear on any credit report which will not affect your ability to qualify for other loans.
By law, a 401k loan is limited to a maximum of $50,000 or 50% of your account balance, whichever is less, within a 12-month time frame. You will need to verify what you actually can borrow with your Human Resources Dept. as there may be lower limits in place within your particular plan. Some plans will allow multiple 401k loans if they adhere to the rules above.
Most likely your 401k plan has multiple subaccounts, and you may be invested in one or perhaps in many of them. Either way, when a loan is taken from your 401k, they will come out proportionately from each subaccount you are invested in. Depending on how your plan is set up you may be able to designate from which subaccount you would like the money withdrawn from. Your HR dept. will guide you here. Additionally, inquire from your HR Dept. to verify if your plan requires that your spouse needs to sign off on any loan requests. Plans differ and this requirement may apply.
Once a loan is taken you will have 5 years to repay it. Loan repayments are usually withdrawn from your 401k contributions which makes it easier to handle as you will not be burdened with another additional bill. In rare instances a particular plan may insist on a payroll deduction instead of a plan contribution for repayment. Each payment must by law be substantially equal every quarter. The loan interest rate is generally 1% - 2% higher than the Prime Rate. The attractive quality of taking a loan from your 401k is that this interest is interest you are paying to yourself.
It is important to note that should you leave the company for any reason without fully repaying the loan, the outstanding balance will be treated as a taxable withdrawal. Taxes will then be due on that amount and anyone under the age of 59 1/2 will be assessed an additional penalty of 10% by the Government.
Determine the amount you need to borrow then contact your HR dept. They may instruct you to apply online or to contact the plan administrator. Within a few weeks, generally much sooner, a check will be issued either by mail or a direct deposit, usually your choice.
Again, a 401k should not be treated as a savings account or debit account and should be a last resort for borrowing money from however when called for, it can be a reliable option.
