Please ensure Javascript is enabled for purposes of website accessibility

Looking to Take Out a Larger 401(k) Loan? You Have Less Than 2 Weeks to Do It

By Maurie Backman – Sep 11, 2020 at 1:18AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If you want to borrow more than the standard $50,000 from your retirement savings, you'd better get moving.

Millions of Americans are struggling in the wake of the COVID-19 crisis, and if you're having a hard time making ends meet, you may be thinking of turning to your retirement savings for help. Normally, distributions taken from an IRA or 401(k) prior to age 59 1/2 are subject to a 10% early withdrawal penalty, but thanks to the CARES Act, which was passed in late March, you can now withdraw up to $100,000 from retirement savings penalty-free, provided you've been impacted financially or healthwise by the pandemic.

But taking a withdrawal from your long-term savings isn't your only option -- you can also borrow money from your retirement plan. Though IRAs don't offer loans, 401(k) plans generally do. And thanks to the CARES Act, you now have an opportunity to borrow more than usual.

Calendar sitting on wooden surface

Image source: Getty Images.

Generally, you can only borrow a maximum of $50,000 from a 401(k), but thanks to the CARES Act, that limit has risen to $100,000 (assuming, of course, that you have that much money in your account). However, that increase is only in effect until Sept. 22, which means that if you're looking to take out a larger 401(k) loan, you'll really need to get moving.

Should you borrow a bundle from your 401(k)?

There's a benefit to borrowing from your retirement savings rather than taking an early withdrawal: You'll be paying yourself back, as opposed to removing a chunk of your savings and having a lot less retirement income to look forward to because of it.

But there's also a danger in taking out a 401(k) loan -- especially a larger one. If you're unable to repay that loan in time, it will be treated as a withdrawal that is subject to the aforementioned 10% penalty. (To be clear, your loan won't be converted to a CARES Act withdrawal that's exempt.)

Normally, you get five years to repay a 401(k) loan, and that applies to the larger loans the CARES Act allows for, as well. And you also won't need to make payments on your loan during 2020 due to the extenuating circumstances at hand. However, if you wind up losing your job or separating from your employer after taking out that loan, you may have to pay it back much more quickly. A loan taken out this September, for example, will need to be repaid by Oct. 15, 2021 if you lose your job, so that's something to keep in mind before you borrow a huge sum of cash.

In fact, while taking out a 401(k) loan might seem like the best bet if you need money, you may actually be better off with a home equity loan or even a personal loan, since those won't be tied to your employment status. And given the number of jobs that are disappearing during the pandemic, that's a good thing.

Furthermore, if you are going to move forward with a 401(k) loan, don't borrow $100,000 simply because you can. Rather, borrow as little as possible to increase your chances of avoiding problems in the course of repaying that sum.

The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.