Frequently Asked Questions
About 401k Loans
What is a 401(k) loan?
A 401(k) loan allows you to borrow money from your retirement savings account, typically up to 50% of your vested balance or $50,000, whichever is less.
How is the interest on a 401(k) loan calculated?
Interest is usually set at the prime rate plus 1%, and the amount is paid back into your 401(k) account.
Are there risks to taking a 401(k) loan?
Yes, risks include potential job loss (which may require immediate repayment), lost investment returns, and reduced contributions, impacting your long-term retirement savings.
How do I repay a 401(k) loan?
Repayments are typically deducted automatically from your paycheck and include both principal and interest.
What happens if I leave my job while repaying a 401(k) loan?
The loan balance usually becomes due within 60–90 days. If you can't repay it, the outstanding balance is treated as a distribution, subject to taxes and a potential 10% penalty.
What alternatives should I consider before taking a 401(k) loan?
Alternatives include personal loans, home equity lines of credit (HELOCs), and using an emergency fund.
Is there double taxation on 401(k) loans?
Yes, repayments are made with after-tax dollars, and you’ll pay taxes again upon withdrawal during retirement.
Can I continue contributing to my 401(k) while repaying the loan?
Yes, most plans allow you to continue contributions, but it's important to verify with your plan administrator.
Can I take more than one 401(k) loan?
Many plans allow multiple loans, but the total amount borrowed cannot exceed IRS limits (50% of your vested balance or $50,000). Check with your plan administrator for specifics.
Does my credit score matter when taking a 401(k) loan?
No, your credit score is not a factor since you’re borrowing from your own savings. However, the loan balance must be repaid as per your plan’s rules.
How does divorce impact a 401(k) loan?
In a divorce, your 401(k) balance (including any outstanding loans) is typically divided according to a Qualified Domestic Relations Order (QDRO). Repayment responsibilities may be affected based on the terms of the settlement.
Can I still contribute to my 401(k) while repaying a loan?
Yes, most plans allow you to continue making contributions while repaying the loan. However, if your contributions are reduced, it can affect your long-term savings.
What happens if I default on a 401(k) loan?
If you default, the remaining balance is treated as a distribution, subject to income tax and a 10% early withdrawal penalty if you’re under 59½.
Can I extend the repayment period for my 401(k) loan?
Most plans limit repayment to five years, but extensions may be granted for home purchase loans. Check with your plan administrator.
What happens if I contribute less to my 401(k) during loan repayment?
Reduced contributions can significantly impact your retirement balance due to lost employer matching and compounding growth over time.
Can I repay my loan early?
Yes, most plans allow early repayment without penalties. Doing so can reduce interest costs and restore your account balance faster.