Ask the Boston Money Coach: Retirement Plans
Question: I already have an existing loan from my 401k plan, I need cash but can I still get money out of my account?
Response from Boston Money Coach Steve Stanganelli regarding borrowing from your 401k.
Not all plans allow employees to borrow from their retirement accounts. And these types of accounts are really not meant to be used as piggy-banks. But the reality is that life happens and if that’s the case then you’ll want to know how to borrow smart.
While your plan offers you the option to borrow, you need to be aware of restrictions put in place by the plan administrator. Such information may be found on the administrator website or in the plan’s summary document available from the administrator or possibly your HR representative.
Generally, if the plan allows loans, the rule is you can borrow up to 50% of your vested balance to a maximum of $50,000 IF you had no other plan loan in place in the 12 month period ending on the day you apply for the loan.
In your case where you have a plan loan outstanding, then the new loan is limited. It is the lesser of 50% of the vested account balance or $50,000 minus the outstanding loan balance in the preceding 12 months.
In addition to the minimum loan amount noted previously, your plan administrator may restrict the reason for the loan to a list of approved reasons (for example, uninsured medical expenses, college tuition, purchase of a primary residence).
Just because you can get a loan from your 401k doesn’t mean that you should. Sure, it is convenient, fast and relatively inexpensive. Yes, you are “paying yourself” for the borrowed money and not a credit card company or bank. Yes, the interest is tax-sheltered and there is no tax consequence for receiving funds as long as you pay it back.
But if you are nearing retirement, may be changing jobs or are facing a lay-off in the near future, need the proceeds for meeting daily living expenses (as opposed to some extraordinary or large capital expense) or are using your 401k like a piggy bank to buy luxury items or pay for a vacation, then the answer is simple: Don’t do it.
For more information on retirement plans, consider the following resources: