Borrowing Against Your 401k Plan

I own and operate a small business that sells solar powered systems for residential applications. I have heard that the IRS allows you to borrow against your 401k plan, but not sure how it works. Can you throw some light on this matter? Darryl Allinder, Albuquerque

Yes, one of the advantages of a 401k plan is that the IRS permits you to borrow against it, but keep in mind that the loan option is not offered with all plans. Also, the maximum amount that you can borrow with your 401k plan is 50% of the 401K account balance or the lesser of $50,000. This is required to be paid over a term of five years. The rate of interest is determined by your 401k plan and is typically just a couple of points over the prime rate.

Borrowing against your 401k is a relatively easy process. Verify if the rules of your 401k plan permit loans or get in touch with the administrator of your plan for more details regarding the same. Your plan may disallow you from borrowing or limit the loan use for certain purposes like medical expenses only. If you have a 401k management package from, you can exclude or include 410k loans, based on your requirements and preference.

To initiate the 401k loan process you will have to fill in a request form, and provide information such as you name, account specifics, Social Security Number, and other details pertaining to the loan. There is no credit check for a 401k loan approval. Also, there aren’t any tax implications when you borrow against your 401k. Once the loan is sanctioned, you have to repay it along with the interest over the 5-year term with loan payments on at least a quarterly basis. This money will be deposited back into your 401K account.

About Elliot Earl, Director, Pension Trade Association
Director, Pension Trade Association Founded in 1982, the Pension Trade Association [California Domestic Nonprofit Corporation #C1629080] is dedicated to helping workers save for their retirement through expanded coverage of 401k -type defined contribution pension plans.

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