A:

When individuals are in a tight spot financially, they usually turn to 401(k) loans. The interest rate for the 401(k) loans are usually a point or two higher than the prime rate, but they can vary. By law, individuals are allowed to borrow the lesser of $50,000, or 50% of the total amount of the 401(k).

Like any other loan, there are pros and cons involved in taking out a 401(k) loan. Some of the advantages include convenience and the recipient of the interest paid. For example, if you take out a 401(k) loan and you are paying 12% interest on it, that 12% is going back to your 401(k) because that is where the money is from. One major disadvantage of a 401(k) loan is the loss of tax sheltered status in the event of a job loss. If you take out a loan on a 401(k) and you lose a job or change jobs before the loan is fully repaid, there is a 90 day period in which the full amount of the loan is to be repaid. If the loan is not fully repaid at the end of the 90 days, not only does the amount become taxable, an additional 10% penalty is charged by the Internal Revenue Service (IRS) if you are under the age of 59.5. (For more on 401(k) plans, read our article: The 4-1-1 on 401(k)s.)

This question was answered by Chizoba Morah

RELATED FAQS
  1. I have a 401k loan, should I receive a form for my income taxes?

  2. How can I take a loan from my 401(k)?

    Learn how you can take a loan from your 401(k) plan with your current employer, and understand the benefits and drawbacks ... Read Answer >>
  3. When taking a loan from my 401(k), is the loan before or after taxes?

    Is the payment towards it before or after tax from my contributions? ... Read Answer >>
  4. Is it possible for me to take 50% of my 401(k) balance as a loan if about .50 cents ...

  5. Can I use my 401(k) as a collateral for a loan?

    Understand more about how 401(k) accounts work, and learn whether it is possible to use a 401(k) account as collateral for ... Read Answer >>
  6. Should we use retirement money to pay off the debt and get back on track?

    I am 40 and my spouse is 47. We have about $40k in credit card debt from a dual unemployment period during the recession. ... Read Answer >>
Related Articles
  1. Retirement

    Sometimes It Pays to Borrow from Your 401(k)

    401(k) loans have been demonized, but they're often the most beneficial source of cash.
  2. Retirement

    4 Reasons Why 401(k) Loans Pay

    Here are four reasons why you should consider a loan from your 401(k) when you have a serious short-term need.
  3. Retirement

    401(k) Loans: The Good, the Bad and the Ugly

    Borrowing from your 401(k) is ready cash from the best possible lender: you. Here's the upside and downside to using the money before retirement.
  4. Financial Advisor

    The Pros and Cons of 401(k) Loans

    A look at the pros and cons of 401(k) loans.
  5. Retirement

    Eyeing a 401(k) Loan? There Are Better Options

    A 401(k) loan may sound good but it's not worth the risk. Here are other options that allow you to leave your retirement funds untouched.
  6. Retirement

    401(k) Debit Cards: Taking A Swipe At Your Retirement Savings

    This is just another more convenient way to borrow from your plan. But at what cost?
  7. Retirement

    8 Reasons To Never Borrow From Your 401(k)

    Find out why dipping into your 401(k) can have serious consequences.
  8. Retirement

    Introduction To SIMPLE 401(k) Plans

    Learn about the features and benefits of the plan that is a cross between a SIMPLE IRA and a traditional 401(k) plan.
  9. Retirement

    5 Secrets You Didn't Know About 401(k)s

    If your employer offers a 401(k), that should be your first stop for retirement savings – especially if your contributions are matched.
  10. Retirement

    3 Reasons Your 401(k) Is Not Enough for Retirement

    Learn the basic structure of a 401(k), and a number of reasons why it may not be substantial enough to secure an individual's living upon retirement.
RELATED TERMS
  1. 401(k) Plan

    A qualified plan established by employers to which eligible employees ...
  2. Direct Consolidation Loan

    A loan that combines two or more federal education loans into ...
  3. Roth 401(k)

    An employer-sponsored investment savings account that is funded ...
  4. Standing Loan

    A type of loan where payments are made of interest only. Repayment ...
  5. Call Loan

    A loan provided to a brokerage firm and used to finance margin ...
  6. Term Loan

    A loan from a bank for a specific amount that has a specified ...
Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center