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Borrowing from 401k Plans

While borrowing from 401k plans may be an option for you, you cannot obtain an unlimited amount from your account. Rather, the IRS has established rules that allow a plan participant to take no more than 50% of his or her vested balance up to a maximum of $50,000 in a rolling 12 month period. In other words, take the highest cumulative loan balance you've had in the last 12 months and subtract it from $50,000. That is your maximum available.

Your employer may have established additional rules such as a limit on the number of loans you can have outstanding at any one time, a maximum number of loans you can take each year, or a minimum loan amount you must take in each instance (usually $1,000). Some employers don't even allow borrowing from 401k plans, and some have restrictions on what type of money you can borrow against (i.e. employer match, profit sharing, etc.)

Let's see some examples:

Judy has a vested balance of $20,000 and wants to take the maximum loan available to her in her 401k. This one's easy because, if you remember, a participant can borrow no more than 50% of their vested balance.

In this case, the maximum that Judy can borrow is $10,000.

John has a vested balance of $230,000 and wants to take the maximum loan that is available to him. This one's a little trickier. Remember that although you can borrow up to 50% of you vested balance, you are limited to a maximum of $50,000.

In this case, the maximum that John can borrow is $50,000.

Jane has a vested balance of $125,000 and already has two loans outstanding which she has had for a couple of years. Loan 1 has a current balance of $10,000, and loan 2 has a current balance of $15,000. How much is available?

If you said $25,000(the max. $50k minus the total outstanding of $25k), you are close, but not exactly correct. Remember, the maximum of $50,000 is reduced by the highest cumulative loan balance you've carried within the last 12 months.

Let's say that 12 months ago, Jane's two outstanding loans were valued at $32,000. You would then simply subtract $32k from $50k to get the amount available. In this case she would have $18,000 available, not the $25,000 you may have initially thought.

As you can see, if you decide to go borrowing from 401k plans, there are some restrictions set forth by both the IRS as well as your employer. Talk to your employer or 401k provider to get find out exactly how much is available to you.