Loans
Some plans allow you to borrow from your plan account. Log in to your account and check the Plan Information section under the References tab to find out if your employer's plan permits loans. Keep in mind, however, that even if your plan permits loans, your investment provider may not. So be sure to contact your financial professional to find out if your investment provider also permits loans
Loans vs. Withdrawals
Unlike withdrawals, a loan can give you access to your retirement savings without taking a taxable distribution or permanently reducing your retirement savings. Loans can also be taken for any reason and do not require a "qualifying event" such as quitting your job or a financial hardship.
You should always consider all other alternatives before taking a loan. The true cost of the loan is more than just the interest you pay; it also includes the lost interest and/or growth from market returns. However, if you do need to borrow, taking a loan from your plan has advantages: it requires less paperwork than if you were to borrow from a bank or other lending institution; you don't need to verify your creditworthiness; and the interest rate is usually lower than other alternatives such as a credit card or personal loan.
How Loans Work
Generally, the maximum amount you can borrow is 50% of your account balance up to $50,000. Loan rules vary by plan and investment provider, so be sure to check your employer's plan and your investment provider's loan rules.
If you take a loan:
- The maximum amount you can borrow may be reduced by any outstanding loan amounts you have with other investment providers under your employer's plan.
- You pay interest on the amount you borrow; however, the interest is not a deduction for income tax purposes.
- You can repay the loan quarterly over a five-year period. This repayment period can be extended to 10 years if you use the loan to purchase a dwelling that will be used as a primary residence.
- If you repay the loan in accordance with the repayment schedule, there is no tax on the borrowed amount.
- If you do not repay or default on the loan when the payment is due, the entire unpaid balance of your loan will be treated as a deemed distribution and is taxable. In addition, this amount could be subject to federal tax penalties.