Everything You Need To Know About Borrowing Against Your 401k ?

6022835400_bac207e533_nIf you’re faced with an unexpected financial situation or you suddenly need cash, one option may be to consider taking a loan from your 401(k).  And, you’re not alone.  According to a study by the Employee Benefits Research Institute (EBRI), nearly 20 per cent of all 401(k) participants had plan loans outstanding.

However, you should think carefully before taking a loan out against your retirement savings.  What are the loan limits?  What are the advantages of borrowing against your 401k?  And what should you be aware of?  We answer all these questions here.

How does a 401k loan work?

When you take a 401(k) loan, you specify the investment account(s) from which you want to borrow money.  Those investments are liquidated for the duration of the loan.

You lose any positive earnings that would have been produced by those investments for the period of the loan. The upside is that you also avoid any investment losses on this money.

2 Things You Need To Know About a 401k Loan

If you’re considering taking out a loan against your 401k, there are two things you should know.

Firstly, there are limits to the amount you can borrow.  In general, you can borrow the lesser of $50,000 or one-half of your retirement plan balance. For example, if your 401k balance is $200,000, you could only borrow $50,000, not half of your plan balance.

To accept the loan, you must typically agree to begin paying back the loan during your next pay period.  Most often, this is done via an automatic deduction from your paycheck.

Secondly, unless you use the money from your 401k loan to buy a home, you must pay the loan back within five years.  If you borrow the money so you can purchase a residence, the length of the loan may be significantly longer.

There are some situations where it can pay to borrow against your 401k plan, as we see next.

Advantages of borrowing against your 401k

One reason that many people turn to a 401k loan is that it can be arranged quickly and easily.  You won’t generally have to go through a lengthy application process or any credit checks and you can often have your cash in just a few days.

In addition, although regulations say that your loan should be repaid within five years most 401(k) loans allow you to repay the plan loan faster with no prepayment penalty.  Your plan statements show credits to your loan account and your remaining principal balance, just like a regular bank loan statement.

Another reason to consider a 401k loan is that the fees for arranging such a loan tend to be modest.  You may pay a small administration fee but there are no significant fees and charges.

Finally, a 401k loan can actually benefit your retirement savings.  As you make loan repayments to your 401(k) account, they usually are allocated back into the investments that you have chosen.  You repay a bit more to your account than you borrowed from it in the form of interest.

If any lost investment earnings during the period of the loan match the interest paid in, there will be no impact on the value of your 401k plan.   If the interest paid in exceeds any lost investment earnings, taking a 401(k) loan actually can increase the value of your retirement fund.

You effectively pay the interest to yourself, in the form of boosting your retirement fund.

While there are many benefits to taking out a 401k loan, there are also some disadvantages, as we see next.

Disadvantages of borrowing against your 401k

It is important that you understand the reasons why many financial experts advise against taking a loan from your 401(k).  Many people believe that a 401k loan should be your last resort as there are some disadvantages to a 401k loan.

For example, there are various tax implications of a 401k loan.  As you pass-up the tax-free compounding of the money you withdraw, you could end up with a significantly smaller fund on your retirement.  And, interest payments from a 401(k) loan are not tax deductible.

You will also pay taxes twice on the amount you took out for a loan.  Your 401k loan payments are deducted after taxes have been taken out of your paycheck.  However, since pre-tax money is usually used to fund a loan, the payments are put back into your 401(k) as pre-tax funds. This means that when you take the money out later, you will have to pay taxes on it again.

In addition, you could face the potential of defaulting on your loan. If you lose your job or if you decide to leave your employer, you will be required to pay off the loan in a lump sum.  If you don’t, you face the potential of the loan defaulting, which will result in a taxable event.

Finally, there is no flexibility with the terms of repayment and your loan repayment is done automatically through payroll deductions, which will reduce your take-home pay.

Should you take out a 401k loan?

Life is unpredictable and you could easily be left in a situation where you need a quick injection of cash.  So, taking a 401k loan could be your only solution.

Before you take out a 401k loan, it’s vital that you explore other options.  Using savings or other types of loan may be a more suitable alternative to borrowing against your retirement funds.  You should be careful not to jeopardise your retirement just for a quick cash fix now.

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Total 189 comments are posted
  1. I don’t really understand how this can be called a ‘loan’ when I would be using my own money? Can you explain?

    Posted by : Peter C
  2. Peter – thanks for your question. You are right, as technically, 401(k) loans are not true loans. This is because they do not involve either a lender or an evaluation of your credit.

    They are more accurately described as ‘the ability to access a portion of your own retirement plan money on a tax-free basis’. You then must repay the money you have accessed under rules designed to restore your 401(k) plan to approximately its original state, as if the transaction had not occurred.

    Posted by : admin
  3. Thank you for writing this, and im glad I found it. I thought that there would be penalties and taxes on a loan but it seems to be if you just take and early withdrawal.

    Posted by : Christine
  4. If you are taxed at the time you request the money and when you file, how much are the taxes of each?

    Posted by : chris
  5. “You will also pay taxes twice on the amount you took out for a loan. Your 401k loan payments are deducted after taxes have been taken out of your paycheck. However, since pre-tax money is usually used to fund a loan, the payments are put back into your 401(k) as pre-tax funds. This means that when you take the money out later, you will have to pay taxes on it again.”

    This is not correct. Only the interest that you pay back to your 401k is subjected to double taxation. The principle is not taxed twice because it was (1) not taxed when you first contributed to your 401k and is (2) not taxed when the money is placed back into the 401k. Don’t think about it in terms of paying back your principle to the 401k with after-tax contributions because that falsely alludes that your principle is being taxed twice.

    Here is an example.
    Let’s say you take out $10,000 from your 401k and put that money in a jar, and the interest rate + prime is 5% for that loan for a year. After that year, you take the $10,000 money from your jar and then add the $500 from the interest back into your 401k.
    1) that 10,000 came out and back in tax free
    2) the $500 in interest was the actual amount that came out from after-tax money.

    When you finally withdraw contributions from your 401k, that total 10500 will be taxed. But you see, only the interest is taxed twice.

    Posted by : Ron
  6. what if you just need like 2000? is it possible to take out such a small amount?

    Posted by : nicole
  7. It is a great article and Ron thank you- your explanation on double taxation was helpful

    Posted by : Shridhar
  8. If you want to borrow a 1000 from your 401k how much has to be in there?

    Posted by : Anonymous
  9. How often can you withdraw from a 401k?

    Posted by : Jasmin
  10. Yes u can take out up to 50k any amount

    Posted by : Stamps
  11. I took out two loans last year and im almost done with my payments, If I decide to pay off my balance early can I reloan right away?

    Posted by : Sukie
  12. I am having trouble getting a definite answer on this. I have an outstanding 401k loan which I took out on November 2 2011. The amount was for 23900. I want to pay off the amount left on that loan and then take a larger loan. I understand that my larger loan can only be 26,100 because I must subtract the $23,900 from the $50000 maximum. Is that true scenario accurate or.

    I also read where I would need to subtract the 23,900 not form the $50,000 but form 50% of my 401k balance which is $ 70,000 or $70,000 x .5 = 35,000 – $23,900 = 11100. If that is correct it would make no sense at all to pay off the balance of the $23900 loan which is $18644.

    Which scenario is true?

    Posted by : Mike
  13. Can I borrow against my 401k although I am no longer employed by the company where it was set up. I am now on a contract to hire job.

    Posted by : Alan
  14. at 3.25% is it still better to twke out 10,000.00 out of the 401 then a car loan of 6.7% or personal loan of 10-12%?

    thank you

    Posted by : kts
  15. Can I have a general loan and a home loan at the same time?

    Posted by : KIm
  16. Although I agree that 401k loan money is not taxed twice, aren’t there still tax implications involved. When you initially contribute to your 401k, the money isn’t taxed, so essentially you were able to make a contribtion of $10,000 and the effect it had on your take home pay was maybe $8,000 depending on your tax bracket. When you repay your loan, you have to pay $10,000 out of pocket to return your account to the previous balance. Would it be correct to say that although it isn’t taxed twice, you lose the pre-tax benefit of your deposit? Maybe someone can explain this to me. I’m a bit of a tax dummy.

    Posted by : YODA74
  17. Okay I still don’t understand could you help me with this scenario that we are facing? My husband had approximately $19,000 in his 401k. He borrowed about $8,000 and is currently paying on that. He currently has a vested amount of $11,000 and found out yesterday he will be losing his job this coming Feb. So now how will this work out? Will he recieve that 11,000 or will they take the loan out of that 11,000?

    Posted by : Chrissy
  18. Amazing how much control the system has over your money. Yes is the gov’s taxess but your money nonetheless. In hardship situations the system only allows you to take out hardship you claim and can also proove. It is set up to keep the bonds of lenders on your back when you can just shake them off you if you just rather pay the penalties and fees the 401k may have, but that is not their allowed planning. One could contribute more percentage to the plan if they simply allowed us to get these banks off our backs by letting move our money as we believe it works best for us even if they penalize our wanting to pay off debt once and for all. Financial advisors don’t recomend borrowing or taking out ” virtual money” 401k but the bills that pile up are not very virtual. Being debt free asap should be the goal, If the 401K system controls my ability to do that then it is really working for me but for the bank institutions.

    Posted by : Jr
  19. I borrowed from my 401k, while under FMLA leave, but the company did not pay the contribution to my account while I was out, but upon my return they began to double and sometimes take up to 5x the amount owed back for the contribution. Is this a standard practice or would they need authorization prior to taking this kind of deduction.

    Posted by : Tred
  20. Ron, correct me if I am wrong, your scenario makes no sense, and seems wrong.

    In the real world someone might take out 50,000 against their 401K to pay off high interest credit cards. The 50,000 that was originally invested was money taken out of my paycheck pre-tax. If I had not touched the 50,000 at all, I would be taxed on that money when I go to withdraw it once I retire. In this case, I get 50,000 cash and pay off my bills. The terms of my loan state that I have to have an automatic deduction to pay off the loan in 5 years. That money is being deducted from my net paycheck after taxes have already been collected. Taxation on 50K number 1. Next I pay back the loan to which I have paid the equivalent of $13,500 in tax already at a 27% tax bracket. Now 25 years from now I retire. I go to take out that 50K, guess what, I will be taxed on it again. So if the rate is the same, I will have paid $27,000 in Tax on 50K. That is a 54% tax rate. Looks like double tax to me…

    Posted by : John
  21. Can u borrow immediately after paying back one loan?

    Posted by : Anonymous
  22. Well in most typical situations. Unless you are Ron who borrows from 401k only to fill a jar. Then repay the loan principal with the money from the jar. Typically peoplee spend what they borrow. Then repay the loan principal and interest with hard earned TAXED money. And god willing you make it to retirement you will be taxed on that same money again as you withdraw it. Now would be a good time to borrow from 401k considering the poor market conditions. May come out ahead by dodging the fiscal cliff. Plus the interest that you pay yourself. Thats my take;)

    Posted by : 8neverenuff
  23. Correct yoda. You do lose out on the pre tax contribution.if you spend your loan You will repay with your taxed income.

    Posted by : 8neverenuff
  24. Think of it this way; say you take the 10k out today and decide not to use it & return it to the account tomorrow – what were the tax implications of doing such? Nothing. Your initial contribution was still pre-tax and the return of the pre-tax funds is still pre-tax; I agree with Ron as well – the writer is incorrect in suggesting that the principal portion (pre-tax contribtutions) are double taxed. The costs associated with taking out a 401(k) loan are the small administration fees and the potential to lose out on investment earnings related to the principle amount of the loan…that’s it!!

    Posted by : NO YODA
  25. John, the reason that it would not be considered double taxed is this: let’s say you did not take a loan against the money (that was never taxed to begin with) in order to pay credit card bills. You would then have been paying the credit card bills with what? Money from your daily earnings. Taxed money. The amount of taxes paid would be the same. But instead, now let’s say you do take a loan against untaxed funds. When you pay that loan back it is with money from your daily earnings. Taxed money. You see where this all comes out the same?

    Posted by : Jones
  26. Im currently paying back a loan from my 401k as I have every year for the past seven years . I borrow 2,000 to purchase christmas then payback weekly for 36 weeks to pay off “loan”. This payback comes straight out of my paycheck and is after tax. So I am therefore going to be taxed twice on that money when I retire. Kind of strange that when original contribution goes in it goes in pre tax, when you borrow against you dont have to pay taxes on it, unless you default, but when you pay it back you pay back with taxed monies. In essence, I will be taxed enumerous times on that same 2000 as I continue to do this yearly.

    Posted by : IN THE REAL WORLD
  27. I think everyone is looking at the double tax issue incorrectly. If you borrow $50,000 from your 401k that is money that you didn’t pay tax on initially. Now remember this is a loan and as with all loans you pay it back from what is left of your paycheck after taxes. So you are not taxed on the $50,000 that you borrowed twice, you are paying the loan back with after tax dollars like you would if you went to a bank. However, if i read this correctly the interest paid on the loan also goes into your 401k so in reality you are helping the fund grow at a predetermined rate of return for that $50,000. The key thing for me is that you can afford the payments and will stay employed for the term of the loan.

    Posted by : Joe
  28. if your fired in 2013 and you have a 401k loan from 2012 which year would the taxes come due.

    Posted by : anonymous
  29. what is the ramifications of this scenario. You are hit with a large unexpected tax bill and do not want to liquidate other incoming producing assets to pay off tax for 2 reasons. First you lose the income and potential gain in value over time and second you will have to pay a capital gains tax in order to pay a tax, double taxation You are self-employed so you are your own employer.

    What should you be worried about if you borrowed 15-20% of the account, pay off the tax to avoid interest AND penalties then repay the loan.

    Posted by : sen snort
  30. Let’s say your income is 100k and you are only taxed once at the end of the year. You then take out 50k from your 401k. At the end of the year, you are ONLY paying taxes on that 100k. You do NOT pay taxes on 100k + 50k. The taxes you pay are taxes that you are paying regardless if you took out the 50k or not. So however that 50k gets back into your 401k, you never paid taxes on that loan. Only the interest that you owe.

    Posted by : Passerby
  31. How much taxes will I pay on for a 6500 dollar loan from
    My 401k? Will my tax refund be substantially
    Lower this year because I borrowed this money?

    Posted by : Anonymous
  32. The only amount you are “double-taxed” on is the interest, and “double-taxed” is a misleading term.

    Think of it more like the interest dollars paid are essentially “after-tax” 401k contributions like many people make after they have maxed out on their “pre-tax” contributions.

    Although you don’t get the initial tax benefit of the deduction, you still get the tax-free compounding.

    Posted by : Fred Mertz
  33. How does this apply to Roth contributions? All of my 401K contributions are pre-taxed so I’ve already paid the taxes on them.

    “You will also pay taxes twice on the amount you took out for a loan. Your 401k loan payments are deducted after taxes have been taken out of your paycheck. However, since pre-tax money is usually used to fund a loan, the payments are put back into your 401(k) as pre-tax funds. This means that when you take the money out later, you will have to pay taxes on it again.”

    Posted by : whipporwill
  34. I’ve been slowly working my way out of debt for the last 5 years. My home loan is “upside down” (I owe 50,000 dollars more than the house is worth). During this period I’ve been paying my property taxes with my Federal Income Tax refund (not the ideal way of doing it since it leaves me dangerously close to the March deadline). Recently I applied for H.A.R.P. refinancing. The loan would reduce my interest rate by 3% and save me hundreds of dollars a month in mortgage payments. The loan is on hold until my property taxes are paid. I was thinking of borrowing against my 401k. Paying off the loan as soon as my tax refund arrives. Is this a bad idea?

    Posted by : martin
  35. If I withdrew $7000 from my 401k, about how much would that translate into in terms of the penalty once I file my 2012 taxes?

    Posted by : KTW
  36. my husband and I are divorcing, and owe approx. 17,000 on our Thrift Savings Retirement Loan.
    Will the plan disburse my half minus the amount owed at the time of the court settlement, or will I have to wait until the loan is fully paid off? (It was a 50,000 loan)

    Posted by : linda
  37. People saying they are not double taxed on a 401k loan principal never go far enough. You are not double taxed until you take a distribution at retirement. I don’t know how youcan look at it any other way.

    The scenario a couple people posted about borrowing the money, then taking it and paying the Loan offoff the next is not reality. At that point, the Loan was never repaid from ur after tax paycheck.

    Posted by : Dave
  38. My question is this, if I have $100,000 in my 401K, and my loan balance is $20,000 at retirement, will they deduct the $20,000 from the $100,000, and distribute the 80,000 to me ?
    Or do I have to pay off the loan from another source, and they distribute the $100,000 (as the loan has been paid off)?

    Posted by : Ron
  39. Im wrong in my post above. There is no double taxation, nor is there a loss of the tax deduction.

    Posted by : Dave
  40. KTW – Thanks for your question. Firstly, it depends why you need to make the withdrawal. In some circumstances you can make a withdrawal from your 401k without penalty. For example, you can make a penalty free withdrawal if you have become permanently disabled. I also assume that you are under 59.5 years of age.

    Otherwise, you will firstly pay a 10% withdrawal penalty (so $700). And, the money you withdraw will be added to your income for the year and taxed at your marginal rate. For all these reasons it’s impossible for us to tell you exactly what you will lose in taxes and penalties as it depends on your particular circumstances (your tax rate etc).

    Bear in mind that David Wray, president of the Profit Sharing/401(k) Council of America, told CNN that people making hardship withdrawals could pay a penalty of up to 40 per cent, once state and federal taxes are added to the 10 per cent penalty.

    Posted by : admin
  41. Ron – that is a very good question. My guess would be that you would be required to repay the $20,000 loan. Presumably you are already making regular payments to this loan through your payroll?

    Does anyone else have a firmer answer?

    Posted by : admin
  42. I have a Q: I contribute the max amount of $17,000 to my 401k each year. Outside of 401k I have not accumulated any savings, but have no debt. I make roughly $130k annually and need to buy a home (first time buyer) for the tax deductions and need to come up with $30,000 in near future for the down payment. I could do one of two things: (1) borrow that $30k from my 401k now, or (2) stop making new contributions for the next two years and put that into a house fund instead.
    If you borrow from your 401k for a down-payment, does that interfere with your ability to deduct mortgage interest payments?
    If I do #2 I will lose out on reducing my taxable income by the amount I would have normally contributed to 401k, but the trade off would be that I am able to deduct the mortgage interest & property taxes instead. Is one better than the other? I am expecting an average salary increase/bonus of 15k annually over the next few years, so a 401k loan repayment can theoretically be done fairly quickly. Also need to consider the compounded interest earnings I’m losing by taking the loan vs not putting in new payments. Is it a wash or is one better than the other? Any advice would be great – Thanks! Steph

    Posted by : Stephanie
  43. Ron is correct, you do not get taxed twice, except on the interest. Consider if you have 50,000 on hand and do not take a 401k loan. If you paid 20% tax you needed to earn 62,500 to net 50,000. Your cost is 12,500 in tax. If you borrow 50,000 from your 401k you get the 50,000 without having paid any tax. You will need to earn 62,500 to net the 50,000 required to repay the loan. The cost of the 50,000 is 62,500 whether you took the loan or not.

    You are double taxed on your interest, but you keep the un-taxed portion of your interest, which is better than paying it to someone else.

    If you expect to be in a lower tax bracket when you withdraw money from your 401K then you’re better off not taking the loan.

    Posted by : richyrich
  44. Thanks, I have another question.

    I am over 59.5 years. My employer does not contribute to my 401K. If I were to withdraw only a portion as distribution, this year, will I be able to treat this as income, and add it to my wages, and have to pay it next year?

    Can the tax burden on this distribution be spread out over a few years?

    As there is no tax penalty due to my age, I thought I could spread the distribution over a few years, and also spread the tax burden?

    Thanks, once again.

    Posted by : Ron
  45. Do i have to report a 401k loan of 6k on my taxes as income?

    Posted by : Amy D
  46. Chrissy,

    Once your husband is terminated, he will receive a notice to pay back the outstanding loan within 60 days or the loan amount will be considered a distribution from his 401K plan and taxed as current income. There is also an additional 10% penalty if his is younger than 59 1/2 years old. If the balance is 8,000 and you are in the 25% tax bracket, the tax and penalty can be as high as $2,800. http://www.401kloantransfer.com specializes in avoiding or reducing 401K loan taxes and penalties. There are several strategies which can be applied to eliminate or reduce taxes. Visit their website and contact them for assistance.

    Posted by : 401K Loan Transfer
  47. I am trying to decide if it is worth it to take an $8k loan to renovate my kitchen to increase the value of my home, as I might want to sell this year. I currently have no outstanding 401k loans. We have no credit card debt.

    Posted by : Catherine
  48. I took out a loan against my 401k for $3400 in 2012.. Do I need to report this on my taxes for this year and will it effect my refund?

    Posted by : Jess
  49. I plan to pay down debt with a loan from my 401k. Will taking out a loan from my 401k affect my credit rating/score when buying a new home?

    Posted by : Dawn
  50. i owe currently have 900 left to pay for the 401k loan i took out 2 years ago. if i pay that back can i take out half of the 401k that i have now? and if so do they have to give me half if i request it…since ive been with my company for years? i currently have $7,090 in the 401k.

    Posted by : ms marie
  51. I I am currently unemployed but have several 401 (K)s, can I still borrow against one of them for a modest amount or would I just have to redeem?

    Posted by : richard enos
  52. Does your employer know your withdrawing the funds from your 401K and if you make too many withdrawals, could your employer get the wrong idea about your ability to manage your finances?

    Posted by : Bob T
  53. Can someone tell me how I could proceed with getting the loan out of my 401K? When I called the fund today, I was told that the only thing I could do is to get the money out for 60 days as roll over and put them back in before 60 days to avoid penalty and tax. I see that a few people posted here already got the loan and making monthly payments? How could I do this? Thank you.

    Posted by : Kevin T
  54. We took a loan of 19,000.00 out in 2011 of our 401k and we were making payments back. In March of 2012, my company got rid of the 401k and made us put our money in a ira. Do I have to pay taxes on the whole 19,000.00 from the year 2011 or do I get a break on some of it because I paid back some already. I am not sure though how much I paid back it was from Nov. 2011 to March 2012.

    Posted by : Help
  55. So this past year I made a hardship w/drawal…I only needed to borrow $700 so they actually w/drew $831 to cover the tax penalties. When I do my taxes here in the next few weeks will I have to pay taxes on that again?

    Posted by : Question
  56. My question was deleted, so I will re-post it.

    If I make too many withdrawals from my 401K, will my employer know?

    Posted by : Bob T
  57. I took out a harship withdrawel last year in october. Can I take out a loan now? I dont have a loan now.

    Posted by : Jackson50
  58. I heard that there were benefits of being over 55 when taking loan against your 401k. Have you ever heard of this?

    Posted by : anonymous
  59. Thanks for your question. I’m not aware of any benefits for taking a loan against your 401k after age 55. Of course, the hardship rules mean that you avoid the early withdrawal penalty if you take money from your 401k after the age of 55 if you have retired or left your job.

    Posted by : admin
  60. Bob – thank for your question. My understanding is that yes, your employer knows about your 401k withdrawals. I believe this is because the IRS requires your employer to verify that any withdrawals are done according to the guidelines.

    Posted by : admin
  61. Dawn – Thanks for your question. Quoting Investopedia: “Receiving a [401k] loan is not a taxable event unless the loan limits and repayment rules are violated, and it has no impact on your credit rating.”

    Posted by : admin
  62. Richard – you can borrow against your 401k. Indeed, investment group Fidelity has seen a significant rise of 401k loans and attributes this to increasing unemployment. For some people – it is their only option; their only form of saving.

    Posted by : admin
  63. Kevin – Thanks for your question. It is a four stage process:

    1. Check with your company’s human resources department or benefits representative that your pension plan allows for hardship loans.
    2. Request the forms to apply for the 401k loan and review the paperwork
    3. Check that you do qualify for a loan under the plan provisions.
    4. Complete the necessary paperwork needed by the retirement plan administrator

    Posted by : admin
  64. Question – When the administrator processes a 401k withdrawal, typically 10% of the gross amount is withheld for federal tax withholding. If the tax amount withheld when the withdrawal was processed does not cover the tax liability for taking the hardship, the excess will be made up when you file their taxes for the year in which the distribution occurred.

    Posted by : admin
  65. Our daughter is graduating this May. We have $90K in parent plus loans and $200 in our 401K.
    We will be 59 1/2 next month. Should we just take out the $90K and bit the bullet and pay it off, or take out just the yearly expense and accumulate interest so as not to be taxes burdened. Our annual gross is already 140K which would definitely push us up the tax bracket.
    Any advise would be appreciated.


    Posted by : Confused Parent
  66. When making up the downpayment to purchase a home, I believe the 401k loan is a smart option. Whether or not its being taxed twice, it beats personal loans which are paid back with after-tax dollars and are at higher interest rates. Now is the time to borrow from a 401k, when the markets pick up at annual return rates better than 15%, you should think twice before withdrawing from a 401k fund.

    Posted by : Craig
  67. If my loan from 401K is $35000, are taxes deducted from the 35000 when I receive it?

    Posted by : eugene
  68. I took out a 401K loan against my account for $20,000 . I was able to pay back a little over $5,000 on that until I became unemployed. I defaulted on the loan and paid the 10% penalty and the taxes on it after it was added to my income for that year. That was over 6 years ago. There is still $125,000 left in the account, though I have now retired. My question is why does my quarterly statement still show I am being charged interest on this loan ? There is a sentence on my loan summary which reads: Deemed distributed loans remain outstanding and continue to accrue interest for account administration purposes unless and until repaid or offset. My next question is if I try to roll over this 401K will this mean they will be able to take all this interest away from my total amount, which is $125,000. The money I borrowed was my money. I paid the penalties. Can you please explain this to me ? thank you

    Posted by : TED
  69. SO if I got a letter that says my 401k loan is in default and IRS received as a distribution what are the penalties? There was two loans all together was about$3400.00. not sure what to do! I left the company.

    Posted by : DP
  70. Eugene – It depends whether it’s a loan or a withdrawal.

    If it is a loan, the money you have invested in your 401k plan has been done pre-tax. When you take a loan the money used to repay the loan has already been taxed. This means that your additional interest going into the account will effectively be taxed twice – when you contribute and again when you withdraw the cash from your account in retirement.

    Posted by : admin
  71. Wife and I are considering a 401k loans ($50k x 2) to assist in purchasing what will be our retirement home (retirement 3 years and 5 years from now). When we leave employer service as a result of retirement, would the loans come due, or could they continue to be amortized and paid over the remainder of the 15 year term? Thanks.

    Posted by : Nick
  72. My husband and I took out a loan against his 401k plan in 2012. Payments come out automatically from his check. My question is will I be getting some statement for tax preparation regarding these loan payments or is it safe to file my 2013 taxes based on his W-2 statement. I don’t want to file my taxes then get a statement in the mail with information that I should have included.

    Posted by : Donna
  73. Does it make sense to still contribute to my 401k if I have a loan outstanding, or should I use the weekly contribution to pay the loan back faster? Thanks.

    Posted by : John B
  74. I got 401k and from that money I only spend $40000 however on my bill letter it says that I have taken out $50000, is this a computer mistake or what?

    Posted by : Chris
  75. So my husband took out about $2000 from his 401k and he was making payments to pay it back through his pay checks, unfortunately he lost that job last year. We have received a 1099-r form for tax purposes meaning they are gonna take out of our tax refund big time because of this. I keep on reading we have 5 years to pay it back. What happens if we do not report this when we do our taxes? Can we report it next year on our taxes?

    Posted by : Michelle
  76. I took out a loan to pay off credit cards, that was not considered a hardship so I have to pay it back. because of this loan my take home pay is lower and I am barely getting by.
    Why cant I just get out of the 401k all together? and not pay it back. Then I would not be in such financial distress.
    The human resource people at my company tell me I cant withdraw unless I leave the company

    Posted by : Anonymous
  77. What if I borrow from a 401 k from my former employer that I have not rolled over? How is repayment usually handled and are the tax implications the same? Thanks

    Posted by : Guy
  78. I have been unemployed for 8 months with no immediate jobs prospects on the horizon. My age is 52. Cash on hand is down to 90 days to cover monthly living expenses. I have about $175,000 in a 401K account at a prior employer. What is the least painful way to access these funds.

    Posted by : Troy
  79. I have a loan from 401k that Ive been paying with payroll deduction as required.My employer has now sold out the company.I will remain employed with the new company.I have been informed that my loan must be paid in full immediatly or it will now be considered a disbursement.I will incur the 10% penalty and also owe taxes on the outstanding 22,000.00 i still owe.My question is can they do this?How can my loan change to a disbursement overnight because of a event totally out of my control such as the ownership change.Please help! I hope there’s some law that dosen’t allow this!

    Posted by : Pat
  80. I terminated my employment in December 2011, and have not actively contributed to my 4O1K plan since terminating employment. I also have not as yet rolled over the 4O1K funds to a IRA. I am now 60 years of age, and I am considering a loan from the 4O1K plan prior to a rollover. My question is, would you please advise what i should do before considering any withdrawal or rollover.

    Posted by : LWG
  81. If you were to take out money from your retirement would that count against you at the end of the your taxes?

    Posted by : Rosa
  82. I took out a loan from my 401k for the purchase of my home. I left that employer prior to the loan being repaid in full. I am still paying on that loan every month (it was never an automatic draft from my paycheck) and I have not been asked to pay the loan off in a lump sum when I left that employer. I still hold the 401k account and never rolled it over to my current employer. I don’t pay taxes on the amount of the loan either. Am I missing something? My sister says I “got one over” on the IRS and should have been taxed on the amount of the loan. I don’t think so. Can you advise?

    Posted by : kalamazoo
  83. I took a withdraw from my 401K in the amount of $4500 to pay my property taxes can I claim a hardship on my taxes?

    Posted by : SP
  84. If I want to take a withdrawal from my 401k account and not a loan, am I still required to pay it back?

    Posted by : Mand
  85. If we used 40,000.00 of a 401K to purchase a home, how much will I pay income taxes?

    Posted by : Karen
  86. I had a loan against my 401k- was used as a down payment on my house in 2011 in the amount of $15,000.00. The company I worked for sold our business in 2012 and thereby by loan went into default. Is there any way that I can claim the $15,000 on my taxes because it was used for purchase of a house?

    Posted by : robin
  87. Mand – Not generally. If you make a 401k withdrawal you don’t normally have to pay the money back. If you take the cash as a loan, you do.

    Posted by : admin
  88. TED – Thanks for your question. Can a professional advisor help TED with his question?

    Posted by : admin
  89. What happens when you have a job attached unemployment claim and you are not getting a check from your work. What happens to the loan during this time?

    Posted by : Elisa
  90. Rosa – If you withdraw cash from your 401k pan, you pay a 10% withdrawal penalty AND income tax on the amount you withdraw.

    Posted by : admin
  91. Chris – You need to check this with your plan administrator.

    Posted by : admin
  92. John B – Thanks for your question. This depends on a number of factors and no single answer is right for everyone. For example, your employer may match your 401k contributions which immediately gives you a 100% gain. This could make financial sense, especially if you are paying a low interest rate on your loan.

    However, sometimes there are emotional benefits of paying down debt and you may feel better not owing on your loan. And, by contributing to your 401(k) plan you will reduce your gross income which could make it harder to keep up with your loan payment.

    Bear in mind that paying off your loan is a short-term decision, while contributing to a 401k for your retirement is a long term decision. Which is more important to you?

    Posted by : admin
  93. Amy D – As long as you pay back your 401(k) loan according to the rules, the money you borrow is not reportable as taxable income.

    Posted by : admin
  94. Jess – As long as you pay back your 401(k) loan according to the rules, the money you borrow is not reportable as taxable income.

    Posted by : admin
  95. I made a loan against my 401k 3 years ago at age 61 and am still a full-time employee; this year made a 2nd loan against 401k. If I go to part-time employment or retire this summer at age 65 and default on both loans will I owe the 10% penalty or just have to claim the balance of both loans as regular income for 2013 ?

    Posted by : Carol
  96. I made loan at 62 from my full-time job 401k plan which I have been paying back by withdrawal from salary. Fall 2012 I made a second loan from 401k, again which I am paying back. I turn 65 this summer and considering either part-time or full retirement. If I retire and default on loans and the balances will become normal income, but am I subject to the 10% penalty since I will be 65?

    Posted by : Carol
  97. I need to pay for a wedding. The budget is $25K. I have $8.5K in utility stock. Should I raid this or take a loan against my 401K?

    Posted by : Father of the Bride
  98. I took a loan out of my 401k in March 2012, made 10 payroll payments according to the loan agreement. During the last 2 months I was out on disability, however, payments were still being made through payroll deductions. We had our home up for sale, an we secured a buyer during this time. I gave my 2 weeks notice in August 2012 at which time I was told that I had until the end of December to pay off the remaining balance. We moved out of state at the end of August 2012, and I rermained on disabilty for the next 6 weeks. Is the balance due taxable and considered as an early distribution and subject to the 10% penalty since I was still out on disability at this time?
    I appreciate any help considering this matter.

    Posted by : Joan
  99. I borrowed from my 401(k) last year and I have repaid $3200 of $5000 (still owe $1800). Now, I need to borrow for first home purchase. Do I have to wait until my old loan is fully paid back or can I borrow for new home now? Thanks

    Posted by : LaLa
  100. I’m in the same situation as TED (posted January 24, 2013 at 10:13 pm and anxiously awaiting an answer)

    I had a previous loan default in 2005. I received a 1099 and paid the taxes and 10% early withdrawal penalty on the full amount of the loan on that year’s tax return (even though I had paid back over 80%) The loan still shows up on my statement and the company is refusing to transfer a significant amount of my funds to our company’s new 401 plan. The reason the give is that they have to “cover” the outstanding loan and interest until I turn age 59 1/2.

    Once I defaulted and they sent me a 1099 for the full amount, should the loan have converted to an early withdrawal? How can the same amount of money be considered a withdrawal AND a loan at the same time?

    I also suspect that many people who defaulted on a loan may be in the same boat but not yet realize it as their company is likely not informing them that the loan is still outstanding. My “notice” is buried deep in my quarterly statement and I only discovered it when we changed plans and the company refused to transfer all of my funds.

    Posted by : David B
  101. Michelle,

    Subject: 401K loan tax and penalty

    401K loans usually are paid back over a five year period but many 401k plan administrators don’t tell you that if the employee terminates employment, the loan must be paid back in full usually within 60 days or the loan will be considered in default and a “distribution of qualified assets”. Under IRS code, the amount of the defaulted loan will be added to the employees taxable income and if the employee is under 59 1/2 years old, an additional premature distribution penalty of 10% will be added to the tax bill. Once the loan has defaulted then it is to late to reverse the tax consequences. On a $20,000 loan this can add up to an $8,000 tax bill.

    Posted by : 401K Loan Transfer
  102. Ted,

    I believe there is an accounting error on behalf of your 401K plan administrator. The only reason I am aware of that you would be charged interest after your deemed distribution is if you missed payments prior to the distribution, However I would think that 6 years of interest would have paid off any missed payments (if there were any).

    There is a possibility the administrator did not offset your loan when the distribution took place…fairly common mistake. I would contact the 401K administrator and demand an answer. If they are not able to provide one, then you can contact the EBSA (Employee Benefit Security Administration) to file an inquiry.

    Posted by : 401K Loan Transfer
  103. If I wanted to withdraw money out of my 401k plan as a in service withdraw. I understand I will pay about 35% in taxes. But I need the money for a down payment for a house. Will that affect me qualifying for a mortgage or will it effect my credit report?

    Posted by : Jdte
  104. I took out a 401k loan 5 years ago, and it is due to be paid off in the next couple of months. 4 years ago, my company changed from 26 paychecks per year to 24. The loan payment amount did not change, and apparently no one balances 401k loans within my company. Now, I am being told I must pay a large lump sum of money to avoid defaulting on the loan.

    I fully understand it is my loan to repay, however, does my employer bear no responsibility in this situation? Are they being forthcoming that there is nothing they can do, or are they covering a mistake they made at my expense?

    Posted by : molly
  105. Question: Are loans against 401k’s reported to the credit agencies (Experian, Equifax, TransUnion) and do they show up as a loan on your credit report?

    Posted by : Martin
  106. Are there any circumstances in which the $50,000 limitation can be exceeded? For example, could my 405(k) hold a mortgage on my new home for, say, $400,000? We would just be exchanging the investment vehicle from stocks and bonds to a real estate holding.

    Posted by : Kathy
  107. If you are terminated after taking the loan then immediately asked to pay the balance, can you pay the loan amount back from the remaining funds left in your 401K plan?

    Posted by : Anonymous Borrower
  108. In considering all the options for purchasing a home while we wait on ours to sell, I came across this site. We have a property we want to secure, but ours has not sold yet, and the seller of this property is not willing to wait. There are bridge loans, second mortgages, etc. We are not the brightest stars in the sky when it comes to finances. 401K holder is 62 years old. So would we be talking about a loan or withdrawal from the 401K? Advice would be appreciated!

    Posted by : confused in Florida
  109. Martin – My understanding is that loans from your 401k are not reported to the credit-reporting agencies. However, if you apply for a mortgage, lenders will ask you if you have such loans and they will count the loan as debt.

    Posted by : admin
  110. LaLa – Yes. If you’ve already taken out a loan, you may be able to take out an additional loan even though you haven’t finished repaying the first one. Bear in mind that there is a limit/restriction on how much you can borrow in total (this depends on your vested account balance and the current IRS limit).

    Posted by : admin
  111. Jdte – Loans from your 401k are not reported to the credit-reporting agencies. However, if you are applying for a mortgage, lenders will ask you if you have such loans and they will count the loan as debt.

    Posted by : admin
  112. Anonymous Borrower – My understanding is that no, you can’t do this. If you are unable to pay back the loan balance, the entire amount you are unable to pay is deemed a distribution, which is likely to be subject to significant federal income tax, state income tax, and early distribution penalties.

    Posted by : admin
  113. I have a Best Buy account that never seems to go down. Interest rate is outrageous, also have a high car payment and other credit card debt. I have a military retirement check coming in plus I’m at employed full time in a very stable company. I was planning on taking a $25k loan from my 401k. With the loan and from other money in my savings I plan to pay off $35k in debt. The total monthly payments going out are currently are about $1,600 my 401 monthly payback will be $450. Would this be a situation where it would be OK to use 401 money? I plan to put the difference from what I was paying into my savings and payoff the 401K as early as possible.

    Posted by : Tony
  114. I am unemployed at the present, but I have 401k’s from different past jobs (total of 8 years or so). My questions are: can I consolidate all the accounts to withdraw some money (claiming hardship-need to pay mortgage to avoid foreclosure)? or can I withdraw from only one account? or can I withdraw anything at all since I am not working any longer with any of those companies anymore? any help will be greatly appreciated.

    Posted by : Mona
  115. Several ppl have asked if they can get a 401k loan from a previous employer retirement account…I didn’t see an answer and I have the same question…

    Posted by : shauna
  116. im trying to borrow some money on my 401k how do i do that?

    Posted by : chad
  117. My husband lost his job last December 2012, all the savings gone and my last resort right now is borrow money from my 401K, I have $35,000 from my employer, if I will borrow maybe $10,000 how much normally is the interest and how much taken out from your paycheck?. Just that our mortgage payment is due next week. Thank you.

    Posted by : LH
  118. Lets assume my 401k plan makes very little return or 0%

    If I take a 5 year 401k loan for $10k at 4.25% it comes out to $12125 with $2125 interest
    That interest is taxed 20% so $637 is lost to the government in “double taxation”.

    If I take that 10k loan invest it and over the course of 5 years i profit $2000
    The $2000 is taxed 20% so i made $1800
    Minus the $637 tax loss and i profited ~$1200

    So after 5 years the money is back in my 401k like nothing happened and i got an extra 1200 in my pocket
    Yes I potentially lose out on the money “I could have earned” if I left it untouched.
    Is there a flaw in my math?


    Posted by : Som
  119. I am 66yrs old and have just taken out the last of my 401K to put down as a deposit on our retirement home …..to the best of my knowledge no taxes have as yet been taken out ….this will be our primary residence ….will any of the tax burden be offset by the purchase……and although I had not made any contributions to my 401K during these past 8-years can I still claim for those previous contributions as a deduction from my final tax bill ??

    Posted by : Paul
  120. i just paid off a loan on my retirement account. How long do I have to wait to borrow on it again?

    Posted by : Mike
  121. Shauna – Generally speaking, a 401(k) plan doesn’t allow a loan after the employee has stopped working for the employer. In fact, any outstanding loans at termination of service quickly become due (usually within 60 days). This actually does make some sense because the funding source for loan payments — the employee’s paycheck — has stopped.

    Posted by : admin
  122. Chad – our article tells you everything you need to know.

    Posted by : admin
  123. LH – thanks for your question. When you take a 401(k) loan, you specify the investment account(s) from which you want to borrow money. Those investments are liquidated for the duration of the loan. To accept the loan, you must typically agree to begin paying back the loan during your next pay period. Most often, this is done via an automatic deduction from your paycheck.

    Secondly, unless you use the money from your 401k loan to buy a home, you must pay the loan back within five years.

    Speak to your plan administrator to determine exactly what your loan repayments would be.

    Posted by : admin
  124. Mike – I am pretty sure you can apply for a further loan immediately.

    Posted by : admin
  125. If you are using the loan for a down payment on a house, must the full amount go towards that, or could you use part for home repairs on my current home?

    Posted by : Anonymous
  126. Mike…check the provisions of your plan. Some plans are designed with a wait period after a loan is paid off to when a new loan can be taken out.

    Posted by : Jim
  127. What should I do if I have taken a larger loan against my 401k plan than actually needed for my home down payment? Is there a “best” application of these funds to avoid any type of penalty or tax implication?

    Posted by : juan
  128. i cashed out my husbands 401k after he passed. they took out all necessary taxes. now its is asking me to pay $16,000. advice please???????

    Posted by : curious
  129. I’m one of the idiots who had one choice. With less than $3,500 in income for the calendar year of 2011, my only option was to cash a portion out from my 401k to pay off my home…or lose it. All that was needed was $128k, but the immediate distribution from my 401k turned into $160k because $32k I never saw or benefited from was immediately directed to the IRS & to State — and that of course bumped my tax burden up to the $160k bracket rather than the $128k I should have been taxed on — DOUBLE taxed on money I worked for. Then the “best” surprise of all??? I had to pay an accountant $900 to tell me that I also owed an additional $36k more in taxes AND withdrawal penalties to both the IRS & State — for a total of $68k (with $3,500 in income for the year)…but then…at $160k I’m “rich”, right? All this to keep myself from being added to foreclosure statistics — while not asking my government for any modifications, favors or handouts.

    With that being said — and without expressing my disgust for the way our money-grubbing tax code is structured…and for the rights we DON’T have to money we’ve set aside over time in our own 401k accounts (AND MUST CONSIDER USING WHEN THIS KIND OF EMERGENCY ARISES FOR SURVIVAL), and since I’ll probably be dead by the time I’ll ever retire, could you please tell me if this amount could be considered a capital loss and included as such in this year’s 2012 filings? If so, what form would I need to use? BTW…this year is “so much better.” My income level is at $7,200! I’m in the money!

    Thanks for any guidance you might give.

    Posted by : Jane
  130. I was laid off, I had a 401k, was not able to repay
    And I defaulted on about 26k, now with tax season
    I have to pay the 10% penalty, plus taxes…
    If , I am working again for a different company
    Can I take a loan from my prior 401k to pay the
    Taxes, I do not want to pay the high interest
    To the IRS

    Posted by : Rose
  131. Hello. I just took out a 50k loan from my 401k and would like to repay 30k of it in a lump sum before the repayment schedule is even set to begin. The repayment is set over 18 months. Will there be any restrictions on my making a lump sum prepayment? Will they create a new amortization and repayment schedule. I do not have a lot of confidence in the plan administratror to answer these questions. Thanks

    Posted by : Doug
  132. Curious – I am afraid we don’t have enough information to work with. Speak to the plan administration or a financial advisor for advice.

    Posted by : david
  133. OK – Lets talk a little bit about clear thinking. The only thing that matter is this. What is the difference between this option and my other options?

    a) If I borrow from a credit card:
    I pay with after-taxed money and give a whole lot of interest to a greedy lender.
    If I default or go bankrupt, next time they want more interest.
    This is what we call A BAD DEAL- A SINKING SHIP

    b) If I borrow from my 401k:
    I pay with after-taxed money and give a little interest to my own retirement fund, where it is compounded by the investment plans I have there.
    If I default (which is a miss-named, because it is my money) I get taxed on the money because I am violating the agreement by which it would be pre-tax. Of course I would get taxed on it eventually, just at a lower income bracket.

    Really people this is easy.


    a) Don’t touch your retirement money and do without whatever you think you need. (Including a more comfortable house – which is not a need, because all you need it a roof and walls to keep you warm at night)

    b) Use your retirement money in a way that forces you to pay it back with interest to yourself, which can be a great way of increasing your retirement moneys while repeating the benefits of having it available to you now.

    c) Keep giving the same hard earned after-tax money to somebody else who will advise you against using your own money with all kinds of manufactured confusion. BECAUSE THEY WANT YOUR MONEY


    a) is unwise if b is an option

    Posted by : Rob
  134. I currently have a balance of $17,000 in my 401k plan and an outstanding loan of $7,500. I am leaving my employer in two months and will not be able to pay to pay the loan back. Assuming I cash out rather than rolling it over, what % will my employer take before disbursing the funds to me? I assume they will also reduce my balance by the amount of my outstanding loan? I’m trying to figure out how much I should expect to receive. Thanks in advance!

    Posted by : Lori
  135. Correction! If you are at 23% tax bracket right now, you cannot assume you are paying 23% when you withdraw funds from your 401k when you retire. The tax bracket is based on the amount you withdraw in that tax year. Example, if you only withdraw $8000 from your 401k that year, the tax percentage will be based on $8000 assuming, you do not have any other income – Personal Exemptions, and Standard Deductions.

    No, you aren’t taxed twice. If you are to borrow the $50k from the bank to buy a car, you would be paying anywhere from 3%-9% if you have good to average credit. When you make the payment those are from after tax money. Example, if your 401k does not bring you at least 20% in return year after year, why keep that money in 401k with very limited way to invest. Take out 50K from 401k and buy a rental property. It can potentially bring in 20-30% income. If you are to borrow from a bank, be expect to pay 7-10% interest. In this case, you have to pay bank the 401k withdraw amount (loan) + interest. But the interest goes back to 401k. It is essentially interests free. First, you save about 5% interest to not borrow from the bank, the 401k loan (is technically interests free, since you are paying yourself interest), and you are making 20% income of a 0% loan. Think about it.

    Posted by : belmeen from yahoo
  136. I have a 401k from a previous employer, I didn’t rollover immediately to my new employer because i had to wait a certain amount of time to contribute, then I forgot to do anything with the 401k from the previous employer. At my new job I don’t have very much in my 401k. So my question is, if the new employer’s plan allows 401k loans, do you think they would let me rollover my old 401k (or part of it) to their 401k, then take a loan from it for a down payment on a new house? Or do you think they would not allow that. Also, can I rollover some to the new company and leave the rest where it is? Note: both 401ks are in accounts with the same administrator, Fidelity, does that help? Thank you so much, we haven’t been able to get a hold of the new companies plan advisor to ask!!

    Posted by : Rollover and Loan?
  137. what happens if I tell my 401K company that my monthly payment is to much for me and it leaves me with less than $600 a month to pay for food, car insurance, phone, cable and other household bills. I still work for my current company but I just can’t afford to pay the monthly $630 dollars

    Posted by : Norma
  138. Lori – You will generally have 60 days after your employment is terminated with your current employer (whom your 401k is with) to pay off the balance of your 401k loan without having the loan balance treated as a withdrawal. Unless you can find another way to pay back the balance of your 401k loans within 60 days of leaving your current employer you will have to pay the 10% penalty and any associated taxes.

    Bear in mind that even if you are not able to come up with the full balance it is well worth it to try and come up with as much of the balance as possible and repay that to minimize the penalty and tax

    Posted by : david
  139. Thanks for your question. A lot depends on the new 401k scheme and whether it will allow rollovers from a previous employer.

    You do have several options available to you. You mention that both accounts are managed by Fidelity – this page from their website may help you https://www.fidelity.com/retirement-planning/learn-about-iras/401k-rollover-options

    Posted by : david
  140. Norma – Speak to your plan administrator. You may be able to reduce your 401k contributions for a short time in order to give you enough to pay your other bills.

    Posted by : david
  141. Are home loans strictly for purchasing or building a new residence? What if I need to get repairs on something major in my home. Can I then take out a home loan.

    Posted by : ceecee
  142. I was off work for a year due to a work related injury now that I am back to work my loan payment have tripled. I cannot afford this what can I do? No one told me this could happen if they had I would have attempted to pay something! HELP PLEASE!

    Posted by : john
  143. I have an outstanding (401k) loan of $18,000 (loan is 5 years old)… now need to file for a hardship withdrawal ($8,000) tuition cost. Will the outstanding loan have an affect on the decision of the hardship withdrawal?

    Posted by : Nina
  144. I had a loan outstanding at my previous employer when I left for another job. The previous employer agreed to let me make my own payments. I currently am making payments on the loan directly to the 401k provider. Will there be any legal implications when I want to withdraw the money when I retire assuming I will have paid off the loan by then?

    Posted by : Gary
  145. I am considering if I should borrow against 401k to pay off other bills that are preventing me from buying
    another home. Q. Do I show this as being a loan on application for home. Thank you

    Posted by : Trucker
  146. How much taxes do u have to pay on an hardship loan we took 5000 out

    Posted by : stacy
  147. Hello I took out a loan of 10,000 and have paid back 2000. I will not be able to pay back the remaining amount due to some hardship. I still have my job. My question I have it on a 2 year payback can i ask them if i can extend it? If I can’t pay it back what can I expect to happen next. I honestly just don’t know. Will they take money out of my check each time and how will I end up paying the taxes on the default? It’s closed for holiday and i can’t get answers. Thx you!

    Posted by : christina
  148. I just want to make sure I was clear the loan was out of my 401k at work where I’m still employed. .
    thx you

    Posted by : christina
  149. Stacy – Your 401k loan payments are deducted after taxes have been taken out of your paycheck. However, since pre-tax money is usually used to fund a loan, the payments are put back into your 401(k) as pre-tax funds. This means that when you take the money out later, you will have to pay taxes on it again.

    And, if you default on your loan payment it is treated as a distribution. This means that your money is taxed and you have to pay the 10 per cent early withdrawal penalty if you are aged under 59.5.

    Posted by : david
  150. Trucker – A 401k loan is considered a debt and, even though you are repaying yourself, the monthly payment toward this debt will be deducted from how much you can afford to pay toward a mortgage. Your 401k loan is reported on your credit report and your mortgage application, so the lender will have this information when considering your mortgage limit

    Posted by : david
  151. Nina – It may. You may have to explain why you need to take a hardship withdrawal rather than another loan from your 401k plan.

    Posted by : david
  152. My employer/plan allows 2 loans at any given time. I have 2 small loans and want to know if I can combine the balance of those two so that I have access in case of emergency.

    Posted by : deb
  153. I just took out an $8,000 loan for a down payment for a car. What happens if I quit or lose my job before I’m finished paying it off?

    Posted by : Mike
  154. Wanting to get a loan from 401k, what reason would they have to deny me?

    Posted by : Skylar
  155. You cannot repay a 401k loan with pre-tax money. If you somehow wrote a check and your employer credited your loan, then that plan is in violation and could be disqualified. Loan repayments must be made through your paycheck and the principal repayment must be made after taxes are withheld.

    So, YES, you are taxed twice on the loan proceeds and “interest.” That works out to a minimum of about 30% total for most people. About 15% in and 15% out. And who knows what tax brackets will be when you retire?

    If you think this is a good idea, then go ahead. I think you are better off going to a loan shark.

    Posted by : Brendan
  156. If default on a $39,000 401k loan how much tax would I have to pay. Single no dependents.

    Posted by : Curious
  157. Hi. I’ve been researching on 401k loans for a few weeks now and found the most help from this article… Especially the comments. So I thought I would post my experience.

    I requested a personal loan of $7k. It was surprisingly simple. I have MassMutual and all it took was a phone call, confirmation, and 7 days letter a check was in my hand. I’m paying back at a 4.5% for a period of 5 years. My plan is to pay back within 6 months but wanted more take home money and made a lot of difference if I chosed 1 year term vs 5 year. Also there was an administrative fee of $125 taken from the balance.

    I contribute 8% now and company matches 7.33% and I’m 100% vested. My loan does not affect that at all. According to my loan document if I loose my job I have till the end of the next quarter to pay it back before its considered income. I’m pretty sure that is my plan and not true in general.

    I requested the loan for piece of mind. I made the mistake to get 3 cc in short amount of time to build up my credit. My interest free period were all over at the same time. I was comfortable paying off my balances but The thought of paying so much interest was causing to much anxiety. I never considered using my 401k to pay off my cc debt but after much thought its the best thing I could have done. According to my budget I will be able to pay off the loan by March 2014.

    My suggestions…
    Read, research and talk to your 401k company. Ask the questions that are posed throughout this article. And then sleep on it before making the commitment.

    If you job is not stable I suggest you don’t do it. I can’t imagine the anxiety if this has to be paid back without a job. Worse yet if paid during your tax return. I have a stable job. I’ve been here for 8 years and have no plans of leaving. We service a large community and unless it burns to the ground I don’t see any change happening. I can be laid off but that possibility is very low.

    The most important this is to be honest. Will the loan help or will it just be a bandage on a large wound. My piece of mind is worth taking money out and loosing what I would receive had the $7k never been touched.

    Hope this helps.

    Posted by : FR
  158. Trucker, David is wrong. Depending on what type of mortgage you are using will determine if the lender will be able to use your 401k loan payment against you as debt. For VA and FHA type mortgages they dont use government loans (such as a 401k loan). However, in a conventional loan, if you are putting less than 10% down, they can use it as a debt against you.
    I actually just had to go through this process to get my home. I had to take out a 401k loan to pay off my travel camper so that the ratios worked out so that I could use my VA loan rather than go with another mortgage option. So happy I found this option so that I didnt have to put down money and pay a monthly PMI!!!!

    Posted by : brandi
  159. My wife was off work for a year due to total knee replacement surgery now that she back to work her loan payment have tripled we cannot afford to pay she have 3 loan what can we do?

    Posted by : Joe Hunt
  160. Can you count 401k loan repayments as contribution to 401k for tax deduction purposes?

    Posted by : curious g.
  161. Why are taxes taken out of your paycheck before your loan payment is deducted?

    Posted by : Teena
  162. I have 12,000 in 401k and looking to take a loan of 3500 for some finance problems im having is this a good idea?

    Posted by : chris
  163. Chris – The article above outlines the main pros and cons of taking a loan against your 401k.

    Posted by : david
  164. Teena – Loan payments are deducted after taxes have been taken out of your paycheck. However, since pre-tax money is usually used to fund a loan the payments are put back into your 401(k) as pre-tax funds. Therefore, when you take the money out later, you have to pay taxes on it again. These are the 401k rules.

    Posted by : david
  165. Curious G – No. Interest payments from a 401(k) loan are not tax deductible.

    Posted by : david
  166. FR – Thank you for sharing your experiences!

    Posted by : david
  167. how muchwill it cost me to take out a 400.00 loan from my 401k and how much will they take from my check to pay it back

    Posted by : lacie
  168. It seems that there is still confusion about being taxed twice on a 401k loan. Here’s the way to look at it:

    Suppose you borrow $50,000 tax free and spend it in a way in which you need income to pay back the loan. In order to borrow this much from your 401k, you must have previously contributed it tax free. Note that you must have contributed much more, but we won’t consider those additional contributions for considering the tax consequences of the loan. When you repay the loan, you will contribute $50,000 from taxed income plus interest from taxed income. When you retire, you will withdraw the $50,000 plus the interest you paid on it and you’ll be taxed on both.

    What are the total contributions? $50,000 (tax-free) + $50,000 (taxed) + interest (taxed).
    What are the total withdrawals? $50,000 (tax-free) + $50,000 (taxed) + interest (taxed).
    Your contributions total $100,000 + interest and withdrawals total $100,000 + interest.

    In the end, you’ll have paid taxes on $100,000 and you’ll have paid taxes on the interest twice.

    What if you take out a personal loan or a credit card cash advance instead? Assuming your 401k remains the same as above, you’ll still have that $50,000 tax-free contribution and $50,000 taxed withdrawal. In addition, you’ll receive a $50,000 tax-free loan and you’ll pay it back with $50,000 in taxed income as well as interest from taxed income.

    In this case, you’ll have paid taxes on $100,000 and you’ll have paid taxes on the interest once.

    Posted by : Gerry
  169. The tax part may seem confusing, but there is no double tax except on the interest. Here’s a simple way to look at it: You take out $10K from your 401K (pre-tax money), spend it, and then you pay back $10K with after tax money. It’s true that the $10K you pay back to your 401K is taxed twice, the first time taxed from your pay check, and the second time when you withdraw at retirement. However, the $10K you already spent was never taxed. So it comes even: You paid no tax on the $10K you borrowed and spent, but you pay tax twice on the $10K that you put back in your 401K.

    Posted by : Mike
  170. My sister has a 401k plan with her company and made a Loan against it a couple of years back now she’s in need of another loan due to a divorce how can she take money if her company only lets her do one outstanding loan????

    Posted by : Tammy
  171. what happens if you have a 401K loan and the company that you work for goes out of business

    Posted by : gary
  172. David’s statement, “the payments are put back into your 401(k) as pre-tax funds”. is incorrect and misleading. First, the loan is paid back with POST-tax funds, meaning you’ve paid taxes on those funds. David then goes on to state that you will be paying taxes on those funds AGAIN when you withdraw. While it’s true that you will be paying taxes on those funds twice, the statement is misleading because the money that you pay back to ANY loan with will be paid back with POST-tax funds and the fact that it happens to be a 401k loan is irrelevant. If you borrow say, $10,000, then you will pay taxes on $10,000 of income before paying back the loan and you will AGAIN pay taxes on the $10,000 that you could have used as a loan from your 401k when you withdraw that $10,000 that you could have used as a basis for your loan. Either way, you pay taxes on $20,000. To imply you’ll only pay taxes on $20,000 when you take a loan out of your 401k and not pay taxes on $20,000 when you take the loan elsewhere is misleading.

    Posted by : Gerry
  173. Gary – Thanks for your question. Has any one experienced this? Does anyone know what happens to a 401k loan when your company goes out of business?

    Posted by : david
  174. Tammy – My understanding is that you cannot have more than one loan at a time from your 401(k) account, so you must repay any existing loan on the account before you borrow from it again.

    Posted by : david
  175. Gerry – thank you for that example.

    Posted by : david
  176. My wife has a chronic life threateing condition and we knew we would have to short sale our current home. I borrowed $30. from my 401K (pension, profit sharing and my contributions) to buy a home to keep a room over ur heads. also there is a lower cose of living and better medical care. I am over 66. What are my tax consequences. No one told me it had to be my FIRST home. The Bank just sent the money. Oh my, I am frantic over this.

    Posted by : Ron
  177. I’ve taken a couple 401K loans, my most recent for $47,000. I wish the whole double taxation lie would be put to bed. You put all the money into your account pretax and you are NOT taxed on it when you take out the loan. You pay the money back with after tax money, just like any other loan. Is there some loan available that allows you to pay it off with pretax money?? I don’t think so. Another common 401K loan lie I frequently see is that you must pay back the loan in full shortly after you leave your employer. This is NOT true with all plans. My plan allows the payments to made until the loan is paid off under the original terms. I verified this before taking the loan, call your plan admin to verify your plan rules, don’t believe the BS posted on the internet! There is so much misinformation floating around that it makes a 401K loan a very scary proposition. I pay back my loans to myself with interest and continue to contribute normally as I always have to my 401K.

    Posted by : Greg
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  180. I still confused on one thing it seems like if i take out of my 401k enough to pay off my auto loan, this
    would protect me if i lose my job. at least i would still have a car that i won’t have to make payments on
    (assuming i default on 401k) they would just the penalties out of my 401k correct ?

    at least i would have a car still etc. that is the only reason i am thinking about taking out of 401k to
    pay of toyota.

    or am i missing something here

    Posted by : mark
  181. I have 2 outstanding 401k loans totaling less than $17,000. The plan just changed whereas I can only have one outstanding 401k loan out. If I pay off both loans down to zero, will there still be that rolling year clause (50-17=33) or can I access the whole $50,000 right away if there is a zero balance?

    Posted by : Barb
  182. Thank you for all of your help! This is a great, quick and easy way to learn about borrowing against your 401K.

    Posted by : Kyle Watson
  183. What if I get a $100,000 401K in a divorce settlement how can I roll that into another 401K in my name and then take a loan on that 401K in my name? I know that if I take that $100,000 401K and take money from it I will onle get $59,000 and the $41,000 would be for penalties for early withdrawl and taxes. I am trying not to lose that Much money and I need the money from the 401k to payoff bills. Any suggestions on this matter?

    Posted by : Anonymous
  184. I borrowed some money from my 401k. my work set it up but never made any payment.they told me two years ago that it’s was going to automatically be taken out of my check. Know there saying it was my responsibility. I never got any kind of late payment notices so I thought every thing was fine. What should I do. Can I please get some help.

    Posted by : tony
  185. I took out a loan 4.5 years ago to remodel a home we were purchasing. I have not been able to pay back the loan and will have a tax consequence this 2014 tax year. Are there any ways to reduce the tax consequence because of using on my new home? Or any other suggestions to reduce the $15K I will owe in taxes for taking the money?

    Posted by : RandallC
  186. If I’ve taken out a loan and paid it off, how soon can I take out another loan. I am going through some financial struggles and “need” the funds.

    Posted by : Vicki
  187. I receive a rollover check from fidelity to vanguard if I want can I b able to change the check will it affect on my taxes..

    Posted by : jackie
  188. Don’t agree interest is paid twice on borrowed funds from 401k. If you borrow from a bank and pay back normally, that usually comes from your paycheck which you have paid taxes on. Your 401k does not change so if you take a distribution you will pay taxes on it no matter what. You do pay taxes twice on the interest you pay your 401k on the amount you borrow, not the principal. What is the difference if you borrow from a bank or your 401k except for that?

    Posted by : Jerry Bennett
  189. We need to borrow $21,000 from our 401K
    We need answers for the following 5 Questions not covered above-thank you

    1) What will the % interest rate be for the 401k loan?
    2) Is it a fixed or floating interest rate?
    3) How much will the monthly repayments be over 5yrs?
    4) Can I pay back the loan quicker with lump sum payments?
    5) Is there any penalty fee or charges for paying off the loan quicker?

    Posted by : Les