Some 401(k) plans allow you to borrow on your 401(k) in the event of financial hardship, or for things like buying a car, home improvements, or to pay your child’s tuition. The IRS suggests best practices, and has guidelines on how to prevent the loan from your 401(k) from being taxable. First, the loan must be 50% or less of your total vested account balance up to $50,000. If you already have a loan out against the plan, you must fully repay your outstanding loan before taking a new loan. Unless it’s being used to buy your principal house, it must be repaid in five years or less, and payments must be substantially equal and no less frequent than quarterly. It is important to consult the IRS guidelines and/or a financial professional regarding loans and early distributions.
While many plans allow participants to take out a loan on their account, it is important to remember that 401(k) plans are designed to help ensure that you have enough money set aside for retirement.
Please contact your plan administrator to see if your 401(k) plan offers loans, as well as your employer’s process for administering this distribution.
The information in this section is provided by Betterment LLC, a registered investment advisor.
