If you need cash, you may be tempted to borrow from your 401(k) rather than applying to a bank or other lender. While not all plans permit loans, many do. And with most plans, you repay your loan through payroll deductions so you're unlikely to fall behind as long as you remain employed.
When you borrow from your 401(k), you sign a loan agreement that spells out the principal, the term of the loan, the interest rate, any fees, and other terms that may apply. You may also have to wait for the loan to be approved, though in most cases you’ll qualify. After all, you’re borrowing your own money.
Federal law caps the amount you can borrow at the lesser of $50,000 or half the amount you have vested in the plan. Sometimes there’s a loan floor, or minimum amount you must borrow. The law also requires that you pay market interest rates. That means the rate must be comparable to what a conventional lender would charge on a similar-sized personal loan.
Normally, the term of a 401(k) loan is five years. That’s the longest repayment period the government allows—though if you prefer a shorter term, you may be able to arrange it. The only exception occurs if you’re using the money to buy a primary residence—the home where you’ll be living full time. In that case, some plans allow you to borrow for 25 years.
| Spousal Stamp of Approval If you’re married, your plan may require your spouse to agree in writing to a loan. This is because a spouse may have the right to a portion of your retirement assets if you divorce. If you borrow, change jobs, and don’t repay, that money may be gone, and your spouse’s share may be affected. |
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