401k Loans - Can You Withdraw Money from your 401k Account as a Loan?
401k retirement plans are meant to grow tax-deferred continuously (without any withdrawals) up until you hit retirement age. However, we don't live in a financially perfect world. Things may come up in your life that require you to have immediate emergency funds for example death of spouse, big medical bill, etc. In such an event, yes you can withdraw money from your 401k retirement account.
Here are some characteristics of borrowing a 401k Loan:
- You can borrow 50% of your entire retirement savings account for upto $50,000.
- Repayments must be made in 60 equal monthly payments over a 5 year period. However, if you borrow this money for a mortgage purpose (your prime place of living), the repayment period is then higher.
- There interest rate you will pay on the loan is the Prime Market Rate + 1%. Check bankrate.com for the current prime rates.
- Repayment of loans will occur automatically from your payroll cheques. You therefore have no control over paying back the money, it is automatically deducted from your checks.
- You can repay back the entire amount of the loan without any penalties.
- You can take out multiple loans and the minimum loan you must take out is atleast $1000.
Advantages & Disadvantages of 401k Loans
Note: Do not default on your loan repayments! Incase your lose your job (for any case whether your employer goes bankrupt or you're laid off), the loan automatically becomes due. You will be given a certain amount of time to pay it back. If you fail to do, you will be classified as "default." If you are on default for a 401k loan, you will be charged a 10% penalty fee for the outstanding loan amount as well as pay federal and local state taxes.