Borrowing Too Much From Your 401k

If you’re going through a hard time and need some extra cash you could opt to borrow money from your 401(k). But doing so should be a last resort as unforeseen circumstances could make this decision sting in the future.

First thing’s first. How much can you borrow? The maximum loan amount is the smaller of $50,000 or half of your vested account balance, meaning that if your balance is $60,000 you can borrow a maximum of $30,000 but if your balance is $200,000 you can only borrow up to $50,000. No matter what, you’ll have five years to repay the loan.

If you’ve borrowed the money and find yourself losing your job, keep in mind that the remaining balance is treated as an immediate distribution, meaning it’s subject to income taxes and early withdrawal penalties, namely a 10% early withdrawal penalty on top of income taxes.

A benefit of borrowing from your 401(k) is the fact that the interest gets added back to the plan. Because of this you’d be paying yourself instead of paying a bank. But a downside is the fact that you’ll be missing out on the market returns on the missing money.

Consider this option carefully if you need to borrow large sums of money from your 401(k) plan!