A 401(k) loan can provide money when you need it, but it’s important to know how the process works. Each employer is different, so a first step is to verify that your job offers 401(k) loans, and you also need to know exactly how much money you have access to.

This video covers the rules and logistics of borrowing from a 401(k) plan. You’ll understand how to get a 401(k) loan and what to expect when it comes to repaying your loan. We also review some costs and risks, including interest costs and potential opportunity cost. But perhaps the biggest risk for some people is needing to repay the loan when you leave your job.

You can typically borrow up to $50,000 or 50% of your “vested” loan balance (see what vesting means here: That can be straightforward or complicated, depending on what types of money you have in your 401(k) and any loans you’ve taken in the past.

Borrowers don’t need to qualify based on a credit score, and you typically repay 401(k) loans over five years. That said, if you use the loan for a primary residence, it may be possible to repay over 30 years—if your employer allows it. Getting a loan from your 401(k) can take several weeks, although the process can move faster, especially with online requests. Plan ahead if you have an important transaction coming up, and remember that it can take a few extra days for a check to clear if you get your money by check.

Does it make sense to borrow from a 401(k)? For retirement income, it’s often best to leave your retirement savings untouched. Borrowing can potentially leave you with a lower account balance, which results in less retirement income. But in some cases, a 401k loan is a reasonable solution. That may be the case when you have toxic debt or urgent medical needs that require cash payments.
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Ultimately, only you can decide if it’s the right move or not. Be sure to speak with a CPA to understand any tax implications. It’s also wise to consult an attorney, who can also explore potential legal issues (like creditor protection, among other things), and a financial planner, who can help you evaluate the big-picture financial aspects. Then, you’re ready to make an informed decision.

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Justin Pritchard, CFP® is a fee-only fiduciary advisor who can work with clients in Colorado and most other states.

CHAPTERS:
00:00 Overview (and Safety Net)
00:59 Get the Rules From Your Employer
01:12 Are Loans Allowed in Your Plan?
01:41 Hardship Withdrawal Alternative
02:05 Current Employees Only (and Transfers From Old Accounts)
02:26 How Much Can You Borrow?
03:23 No Credit Check & Limits From Previous Loans
04:04 How to Get Your 401(k) Loan: Logistics
04:53 How Long Does it Take?
06:20 Interest On Your Loan vs. Market Earnings
07:30 Prime Rate Plus Extra
07:38 Administrative Fee: Initial and Ongoing
07:54 Potential Taxes if You Don’t Repay
09:20 Repaying Your Loan
10:18 What if You Leave Your Job?
11:04 Repaying to an IRA?

IMPORTANT:
It’s impossible to cover every detail and topic in a video like this. The only thing that’s certain is that you need more information than this. Always consult with a CPA before making decisions or filing a tax return. This is general information and entertainment, and is not created with any knowledge of your circumstances. As a result, you need to speak with your own tax, legal, and financial professional who is familiar with your details. Please verify with your plan administrator when employer plans are involved. This information may have errors or omissions, may be outdated, or may not be applicable to your situation. Investments are not bank guaranteed and may lose money. Opinions expressed are as of the date of the recording and are subject to change. The Comments section contains opinions that are not the opinions of Approach Financial, Inc., and you should view all comments with skepticism. Approach Financial, Inc. is registered as an investment adviser in the state of Colorado and is licensed to do business in any state where registered or otherwise exempt from registration….(read more)

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How 401(k) Loans Work: What to Expect

Planning for retirement can be a daunting task, but one of the most effective ways to save for your golden years is through a 401(k) account. Offering tax advantages and the potential for employer matching contributions, a 401(k) plan can help you reach your retirement goals faster. However, there may come a time when you need access to your 401(k) funds before you retire. In these situations, a 401(k) loan may be an option worth exploring.

A 401(k) loan allows you to borrow against the balance in your retirement account, providing you with much-needed funds in times of financial need. While the specifics can vary between employers, here is an overview of how 401(k) loans typically work:

Eligibility: Not all employers offer 401(k) loans, so the first step is to check if your plan allows for this option. If your employer permits loans, you can generally borrow up to 50% of your vested balance or $50,000, whichever is less.

Application and Approval: To apply for a 401(k) loan, you will need to fill out the necessary paperwork provided by your employer. The application process usually involves specifying the amount you wish to borrow, the repayment period, and any specific loan terms. Approval for the loan is generally straightforward, as it is not dependent on credit scores or income. Instead, it is based on the fact that you are borrowing from your own retirement savings.

Repayment Terms: Typically, a 401(k) loan must be repaid within five years, although some employers may offer longer repayment periods for loans taken to purchase a primary residence. Loan repayments are usually made through payroll deductions, with equal amounts deducted from your paycheck each pay period.

Interest Rates: While you are borrowing from your own retirement savings, it is not an interest-free loan. Borrowers must pay interest on the amount borrowed, though the interest paid goes back into your own 401(k) account. The interest rates for 401(k) loans are usually set by the plan administrator and are comparable to or slightly higher than prevailing market rates.

Investment Implications: When you take a 401(k) loan, the funds you borrow are generally no longer invested in your retirement account. As a result, you miss out on any potential investment gains on that portion of your retirement fund during the loan term. It is important to consider this opportunity cost when deciding whether to take a loan or explore other financing options.

Repayment in Case of Job Loss: One of the key considerations when taking a 401(k) loan is the repayment terms in case you leave your job. If you leave your current employer, whether voluntarily or involuntarily, there is typically a grace period of 60 days to repay the outstanding loan balance. Failure to meet this deadline may result in the loan being treated as an early distribution, subjecting you to income tax and potential penalties.

While 401(k) loans can provide much-needed financial assistance when you need it, it is crucial to consider the long-term implications. Withdrawing funds from your retirement account now means potentially compromising your financial security in retirement. It is recommended to explore other options, such as emergency savings or low-interest personal loans, before tapping into your 401(k) savings.

In conclusion, 401(k) loans offer individuals a way to access funds in times of need without the same credit requirements as traditional loans. However, it is important to consider the potential drawbacks and implications of taking a 401(k) loan. Before making any decisions, it may be wise to consult with a financial advisor who can help evaluate your specific situation and offer guidance on the best course of action to meet your financial needs and retirement goals.