401K Loans-Only When You Are In a Financial Pinch

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by Fern LaRocca CFP®

in 401K,401k Contribution Limits,401k Contribution Limits,401k limits,401K Maximum,401k Withdrawal

Before you get all excited about the possibility of taking money out of your 401K without penalty, consider these facts:

For a loan to not be treated as a taxable distribution it has to be repaid within 5 years

and it can’t exceed the lesser of $50,000 or

the greater of 1/2 of the nonforfeitable accrued benefit in the plan or

$10,000.

You must make level payments over the term of the loan and the level payments do not apply while you are on leave without pay for up to one year.

You MUST pay off the loan before you leave employment or else the unpaid portion is a taxable distribution and subject to the premature distribution penalty (if under age 591/2 ) or a taxable distribution if over age 591/2.

If you want the maximum balance in your 401K, try not to take out a loan but if you do, follow the tips above.

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{ 3 comments… read them below or add one }

Liz at

Most 401k plans state that the loan amount becomes due within 30 days after a person gets laid off or leaves the company. Maybe they give a few more days in the case of a lay off but the bottom line is, in this economic environment, borrowing against a 401k is very risky.

Mike Stankavich at

I have found that it depends on the plan. In my employers plan they state that they will send you a payment book and allow you to continue to make the payments after you leave employment, but if you don’t make the payments, your loan is automatically converted to a distribution.

Another important thing to remember about 401k loans is that although the loan interest is paid into your account, you are using after tax dollars to make those payments. So you will be taxed again on that interest when you take distribution after you retire. As you say, loans should definitely be a last resort.

Fern LaRocca CFP® at

Good point, Mike! Thanks