Some 401(k) plans allow you to borrow against your 401(k) to meet your financial needs, in exchange for a promise to repay the borrowed amount (often through payroll deductions) to your account. If you apply for a loan, it must meet the terms set out in your plan’s loan policy. Typical terms include a maximum loan of up to 50% of your vested account balance (capped at $50,000 and further restricted by loans you had in the last 12 months), and repayment within 5 years. The interest rate set for your loan will be interest that you pay back to your own account (not to a financial institution).
It’s important to note that plans often require full repayment of the loan upon termination of employment, so if you think a job change may be in your future, consider whether you’ll be able to repay the loan out of pocket or plan for the tax bill due if you cannot.
While many plans allow participants to take out a loan on their account, it is important to remember that 401(k) plans are designed to help ensure that you have enough money set aside for retirement.
Your Summary Plan Description (SPD) can provide more information on what types of withdrawals your plan allows, and you can see more information about loans you may be eligible for by selecting your 401(k) account in the withdrawal flow here.
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