Can One Borrow Against a 401K Retirement Plan?

The Internal Revenue Service makes it very difficult to take an early withdrawal from your 401k plan, limiting distributions to when you leave employment, become permanently disabled or reach age 59 1/2. However, it permits people to borrow money from their 401k plans.

Size

You can take multiple loans from your 401k plan. However, the total cannot exceed $50,000 or half your account balance, whichever is smaller.

Time Frame

You must repay the loan within five years. If you fail to repay the loan, the IRS will treat the loan as a distribution from your 401k plan, which will result in taxes and possibly early withdrawal penalties if you are not at least 59 1/2.

Warning

A 401k plan loan must be repaid immediately if you leave employment, even if you are terminated through no fault of your own. Failure to repay the balance results in the remainder being classified as a distribution.

References

• Internal Revenue Service: General Distribution Rules
• Smart Money: Tapping Your 401k Plan Before You Retire