How to Take a Loan From Your 401k When You Are Unemployed
401(k) loans are not loans in the traditional sense because you are borrowing money, from you. As of this article's publication, the Internal Revenue Service allows 401(k) account holders to borrow, tax-free, up to 50 percent or $50,000, whichever is less. Your credit score does not factor in whether you get a 401(k) loan. If your 401(k) loan defaults, you are subject to the IRS early withdrawal penalty of 10 percent and have to pay income tax on the funds. 401(k) loans can help fill the gap with short-term cash needs while you are in between jobs.
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Instructions
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Review your 401(k) program guidelines to ensure a provision exists that allows you to borrow money. Not all plans allow loans.
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Contact your plan administrator to begin a loan application over the phone. Write down any documentation the plan administrator requires. Some plans also allow you to start the process online.
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Assemble all requested documentation and give it to the plan administrator.
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Review the loan terms. 401(k) loan terms are five years, unless the money is for a housing need, then the loan has a 15-year term.
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Pay back the loan. If you don't, the money is a payout. Defaulted 401(k) loans are subject to a 10 percent early withdrawal penalty. If your administrator allows payroll deduction repayment, do it.
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Tips & Warnings
You must repay 401(k) loans in full before you are able to take any regular disbursements, so plan accordingly.
