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 ,000 or 50% of your “vested” loan balance (see what vesting means here: https://youtu.be/KWffAznGNZA). 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.
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