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  1. Home
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  4. How to Borrow Against a 401K Plan

How to Borrow Against a 401K Plan

November 28, 2008
By: Pamela Gardapee
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The 401(k) plan is a retirement fund to which employees and some employers make pretax contributions each pay period. When you take money out of the plan before your retirement age, the money is taxable and penalties are applied. You can borrow money from your 401(k) without penalty if you pay the money back to the fund through payroll deduction in five years. Interest is attached to the loan, but it is low. As of publication, the most you may borrow from your 401(k) plan is 50 percent of the balance, or up to $50,000, whichever is smaller.

Step

Contact the account administrator -- the financial company that maintains your 401(k) -- or the human resources department where you work to see if you can borrow. Ask if there are any restrictions on how the borrowed money can be spent. For instance, some plans only allow you to take a loan against the fund for education or medical expenses. Some plans don't have restrictions.

Step

Ask for a loan from your 401(k) plan by contacting the administrator. Some administrators require that you fill out a request form and submit it through the mail, but many financial institutes complete the loan process over the phone. You will need to tell the administrator your full name, how much money you need, the account number and your Social Security number. No credit check is done when you borrow from your 401(k) plan.

Step

Choose a repayment plan that will meet your needs and budget. The administrator will ask you how long you require to pay back the loan. You can choose from one to five years. Remember that while the money is on loan, it is not making any money for your future retirement.

Step

Look at your pay stub one to two weeks after the loan is completed. You will see a deduction labeled "401(k) Loan" or something similar. You will continue to see this deduction until the 401K plan loan has been repaid. If you don't see the deductions after two weeks, contact yout payroll department immediately to make sure it corrects the problem.

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