How to Do a 401(k) Loan

How to Do a 401(k) Loan
You can do a 401k loan, but do so cautiously.

Step 1

Talk to your 401(k) retirement plan administrator. Your first contact should be your human resources or payroll department. They either handle the 401(k) program or can refer you to an external person who handles 401(k) loans, 401(k) withdrawals, and other 401(k) questions.

Step 2

Ask about the rules for borrowing from your retirement plan. Most plans will allow you to borrow up to a certain percentage (usually 50 percent or less) of your 401(k) account balance. Make sure to ask about the loan repayment rules.

Step 3

You will usually be required to make minimum monthly payments, plus interest. The interest usually goes into your account. But keep in mind that while you are "making" loan interest, you are missing out on the opportunity for that portion of your money to grow in mutual funds. Also, you are footing the bill for that investment "growth".

Step 4

Make sure to ask about the rules when you leave the company. With most plans, you will be required to pay back the entire balance of the loan when you leave the company, usually within 90 days of termination. If you don't, the IRS may require stiff penalties when you file your taxes at the end of the year.