The Cost of Borrowing From Your 401(k)January 6th, 2016
The Cost of Borrowing From Your 401(k)
A 401(k) loan appears to have some advantages over a traditional loan. You can borrow up to 50% of your vested amount or
$50,000, whichever is less. If you repay on time, the loan is shielded from taxes and penalties. A typical rate is prime or
prime plus one percentage point. To further sweeten the deal, you pay the loan and interest back to yourself. To see what
this means in terms of real numbers, test some scenarios below.|
But there are disadvantages. Most plans have a five-year repayment window. If you leave your employer (even if it's not your choice to leave), most plans require you to repay the outstanding balance within 30 to 90 days. If you cannot repay, your loan is considered in default and the government treats the outstanding balance as a taxable withdrawal. You'd owe income taxes on the outstanding balance and, if you are younger than age 59 1/2, you also may owe an early withdrawal penalty. That could force you to cash in more of your plan assets to make those payments—and that amount also is subject to taxes and a possible penalty.
Some plans charge fees when you borrow from your 401(k). Plans can charge a one-time fee, maintenance fee, or a combination. Each plan may have different fee structures, so review your plan rules before you borrow. Talk to the people at your credit union about other loan options.
Provision of this calculator is not an offer of credit. Its use in no way guarantees that credit will be granted. This calculator is solely for informational purposes and provides reasonably accurate estimates; the calculations are not intended to be relied upon as actual loan computations.