7 Need-to-Know Things About 401(k) Loans

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Hand placing a coin into a glass jar labeled "retirement" with stacked coins and an alarm clock next to it. — Image source: Getty Images.

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1. You can borrow up to $50,000 or 50% of your vested balance.

A 401(k) loan is limited to the lesser of $50,000 or 50% of your vested balance. Of course, you can only borrow as much as you have available in your 401(k), so if your balance is smaller, you won't be able to take out a loan for the full allowable amount.

2. You typically have five years to repay the loan.

A 401(k) loan must be repaid within five years of borrowing the money from your account. Repaying the loan on schedule is crucial to avoid early filing penalties and other tax consequences, which are discussed below.

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Weigh the pros and cons before you take out a 401(k) loan

Always carefully consider the pros and cons before you borrow against your retirement account. Your financial future is at stake when you withdraw invested funds that should be helping you to build security in your later years.

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About the Author

Kailey Hagen, CFP, is a contributing Motley Fool retirement analyst covering Social Security, Medicare, and retirement planning. Before The Motley Fool, Kailey was a research analyst for Reviews.com focusing on credit and banking products. She is a Certified Financial Planner® and holds a bachelor’s degree in English from the University of Wisconsin-Madison.

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