401k loan how does it work

The maximum loan term is five years — with one possible exception. Loan payments are typically fixed and must be made at least quarterly. You might be able to make payments with after-tax deductions from your paycheck. While k loans can be a low-cost way to borrow money, there are some drawbacks to consider, too. Compared with other forms of borrowing, k loans are a low-cost way to borrow money.

This could be a better option than using a credit card or taking out a loan that could have a higher interest rate. Interest rates vary, but you must be charged a rate comparable to the rate you would get if you took out a personal loan of a similar size through a traditional lender. When you borrow money from your k , that money is no longer invested, which means you could potentially miss out on years of investment growth. On top of that, if you decide to reduce or stop contributions to your k account as you repay your loan, you could miss out on any returns on those contributions.

You may be able to access your money within a week. If you miss loan payments and your loan goes into default , it can be treated as a retirement plan distribution. It could get even more expensive from there. So you may need to seek funds elsewhere. You have limits. You might not be able to access as much cash as you need. You could pay taxes and penalties on it. Under the new tax law, k borrowers have until the due date of their federal income tax return to repay in such circumstances. The old rule called for repayment within 60 days.

A loan allows you to avoid paying the taxes and penalties that come with taking an early withdrawal. Additionally, the interest you pay on the loan will go back into your retirement account, although on a post-tax basis. One alternative to a k loan is a hardship distribution as part of an early withdrawal , but that comes with all kinds of taxes and penalties.

A hardship distribution through an early withdrawal covers a few different circumstances, including:. Here are a few ways to sidestep those hefty levies and keep your retirement on track.

Here are a few other places to find money. Use your savings. Your emergency cash or other savings can be crucial right now — and why you have emergency savings in the first place. Take out a personal loan. Personal loan terms could be easier for you to repay without having to jeopardize your retirement funds. Depending on your lender, you can get your money within a day or so.

A home equity line of credit , or HELOC, is a good option if you own your home and have enough equity to borrow against. Get a home equity loan. This type of loan can usually get you a lower interest rate, but keep in mind that your home is used as collateral.

While easier to get, make sure you can pay this loan back or risk going into default on your home. If taking money from your retirement is your only option, then a k loan may be right for you. However, try to find other funds first before tapping into this option.

Depending on what you need and when you need it, you may have other choices that are better for your situation. How We Make Money. Editorial disclosure. James Royal. Written by. Bankrate senior reporter James F. Royal, Ph. The offers for financial products you see on our platform come from companies who pay us. The money we make helps us give you access to free credit scores and reports and helps us create our other great tools and educational materials.

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That's why we provide features like your Approval Odds and savings estimates. Of course, the offers on our platform don't represent all financial products out there, but our goal is to show you as many great options as we can.

Provided your k plan permits loans, borrowing from your k may help you pay bills, fund a big purchase or make a down payment on a home. If your employer provides a k retirement savings plan, it may choose to allow participants to borrow against their accounts — although not every plan will let you do so.

As long as you have a vested account balance in your k , and if your plan permits loans, you can likely be allowed to borrow against it. Plans can set their own limits for how much participants can borrow, but the IRS establishes a maximum allowable amount. That provision expires on Sept.