If your employer’s plan offers loans, you can generally take a loan for any purposes. However, the following conditions apply to participant loans:

• The amount of your loan cannot exceed the lesser of:
• • $50,000, minus your highest outstanding loan balance during the past 12 months, or
  • The greater of $10,000 or ½ of your vested account balance
• The length of the loan cannot be more than five (5) years. Taking a loan out for the purposes of purchasing a principal residence? Your employer’s plan may allow a term period up to 15 years.
• You must make loan repayments at least quarterly over the life of the loan.

The Pros:

• It’s easy to get a 401(k) or 403(b) loan. There is no credit check or long credit application form. Some plans only required you to call the recordkeeper or fill out a short form.
• Plan loans can have a low interest rate. You pay the rate set by the plan, typically one or two percentage points above the Prime Rate.
• There usually are no restrictions. Most plans allow you to borrow for any reason, or require certain conditions to bet met.
• The interest you pay back is paid to yourself, not to the bank or credit card company.

 The Cons:

• You have to pay it back. If you terminate employment, your employer may require you to repay the loan within a certain amount of time. Otherwise, unless you are at least 59 ½ years old, you will pay penalties (typically 10%) and additional taxes (defaulted loan amounts are treated like an early retirement withdrawal), unless you repay the loan by your tax return deadline.
• There are opportunity costs. Taking money out of your 401(k) or 403(b) account can make your retirement money grow more slowly. The money is taken out of your investment accounts and then added back in as you pay it back.
• Interest on the loan is not tax deductible, even if you borrow to purchase your primary home.
• You have no flexibility in changing the payment terms of your loan.

Yes, most plans allow longer pay back terms when the loan is going to be used to purchase a primary residence. The term can up to 15 years.

Generally, if you leave your job regardless of voluntarily or involuntarily, your employer may require you repay the loan within a certain time. Prior to the passage of the Tax Cuts and Jobs Act of 2017 (TCJA), plan participants who had left employment with an outstanding loan were expected to pay off the balance within 60 days of separation or face a 10% withdrawal penalty and have the distribution be considered taxable income. The TCJA made paying back plan loans for favorable for you, as individuals now have until the filing deadline of their individual tax return to avoid the tax consequences of a deemed distribution of an outstanding plan loan.

Once the loan is taken out, your payments will be withheld from your pay each paycheck and you generally can’t stop this process.

You will receive a 1099 which will show you the exact amount to report. This amount will also be reported to the IRS.

Summary Plan Description (SPD). Your plan’s SPD contains treasure trove of information.