401k Loan Basics

401k Loan Basics

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

Below are some basics about 401k loans.  Please review your Summary Plan Description for specific guidelines for loans in your 401k plan.

• 401k plans can offer loans to participants however, they are not required to.

• 401k loans do not require a credit check.

• Most 401k loans are required to be paid back over a maximum of five years (longer repayment periods are allowed if the proceeds of the loan are used to purchase a principle residence).

• There is usually a one time loan origination fee that can range from $50 to $100.

• There is no tax deductions for interest payments made on a 401k loan.

• Some 401k plans do not allow you to make contributions again to your 401k until you have repaid your 401k loan.  This could mean that you might lose out on any employer matching contributions while you are paying back the loan.

• Some plans have a minimum amount (usually $1,000) that you must borrow when you take out a 401k loan and you are generally allowed to borrow a maximum of 50% of your vested balance up to a maximum of $50,000.

• When you take a 401k loan then those funds that are outstanding as your loan balance are missing out on any potential growth.

• If you leave the employer that you work for (either voluntarily or involuntarily) and you still have a 401k loan outstanding then you most like have only 60 days to fully repay your entire remaining loan balance.  If you do not fully repay your remaining loan balance then the loan is considered  to be an early 401k withdrawal; unless you meet one of the allowed exceptions, you have to pay a 10% early withdrawal penalty in addition to having to report the amount as taxable income on your tax return.

Kim Lubbers, CPA