How to Borrow With My 401k as Collateral
If you have a 401k plan and your employer permits loans, you have a guaranteed approval for a loan for any reason. In addition, when you pay the loan back with interest, both the interest and principal go into your 401k plan. Despite these advantages, loans using your 401k plan as collateral are not without their drawbacks. When you take out the loan, that money does not reap the returns of the 401k plan investments and if you default, you must report the balance as a taxable 401k plan distribution.
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Instructions
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Consult your 401k plan documents to determine whether your company’s plan allows you to borrow from your account. Despite the IRS' allowing plans to offer employees the ability to take a loan, not all plans provide this benefit to participants.
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Calculate the maximum size of your loan by multiplying your vested account balance by 0.5 and comparing the result to $50,000. The smaller of the two results is your maximum 401k plan loan. For example, if your vested account balance equals $90,000, you could borrow a maximum of $45,000.
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Call your 401k plan administrator to request a loan. Depending on your plan, you may be able to complete the loan request over the phone. However, other plans may require a paper application.
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Pay off your loan in installments, at least quarterly, according to your loan terms. If your employer offers repayment through payroll deductions, consider signing up so that you do not accidentally miss a payment. Defaulting on your 401k plan loan payments results in the IRS considering the balance to be taken as an early distribution.
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