Taking money from your 401(k) through a loan can provide access to funds, but it’s crucial to understand the implications. A 401(k) loan allows you to borrow from your own retirement savings. Generally, you can borrow up to 50% of your vested balance, with a maximum of $50,000. However, if 50% of your vested balance is less than $10,000, you may be able to borrow up to $10,000.
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Repayment of the loan, including interest, is typically required within five years. Your employer’s plan will outline specific rules regarding repayment terms and the maximum number of outstanding loans allowed. In many cases, spousal consent is necessary before taking a 401(k) loan.
One significant advantage of a 401(k) loan compared to a withdrawal is the avoidance of taxes and penalties. The interest paid on the loan is credited back to your retirement account. Furthermore, missed or defaulted payments on a 401(k) loan do not affect your credit score since they aren’t reported to credit bureaus.
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However, there are downsides to taking money from your 401k via a loan. If you leave your job, you might have to repay the loan in full within a short timeframe. Failure to repay results in loan default, triggering taxes and a 10% penalty on the outstanding balance if you’re under 59 1/2. Additionally, borrowing from your 401(k) means missing out on potential investment growth within the tax-advantaged account. This lost growth could outweigh the interest you pay on the loan. Carefully consider the pros and cons before taking money from your 401k.
