Your 401(k) and loans: What to do if you need the money before retirement

How do you borrow against your 401(k) plan?

Retirement accounts are designed for you to hold until you retire. That’s why it’s generally difficult (and costly) to withdraw money from a retirement savings account before age 59 ½. Borrowing from your 401(k) may impact your investment performance and cause tax issues. 

However, while your nest egg may be impacted, there are several ways to borrow against your 401(k) plan.

Short-term 401(k) loans

• You may consider taking a loan on your 401(k) if you have a one-time demand that requires a lump-sum cash payment or an emergency that blocks your normal income flow.

• You can borrow up to $50,000 or 50% (whichever amount is less) of your vested balance within a 12-month period.

• You’ll have to pay back that money, including interest (rates depend on the current prime rates), within five years, in most cases (be sure to confirm with your plan provider).

Note: Technically speaking, 401(k) loans aren’t traditional loans, as they do not involve lenders or a credit inquiry.

• Unlike a 401(k) withdrawal, you won’t have to pay taxes and penalties on your loan—and the interest you pay goes back into your retirement account. 

• If you were to leave a job with an outstanding loan on your 401(K), you may have to repay your loan in full in a short time frame (or, you run the risk of defaulting, in which you’ll generally owe taxes and a 10% penalty if you’re under 59 ½).

Hardship withdrawals

• Depending on your situation, you may qualify for a 401(k) withdrawal, which differs from a loan. 

• According to the IRS, a hardship withdrawal is prompted by an immediate, heavy financial need including:

• • To pay for certain medical expenses

  • To buy a home as a principal residence

  • To pay for up to 12 months’ worth of tuition and fees

  • To prevent being foreclosed on or evicted

  • To cover burial or funeral expenses

  • To pay for repairs or losses to a principal residence (such as from a fire, earthquake, or flood)

• In these scenarios, you're not required to pay back 401(k) funds and assets.

• However, if you take out money before age 59 ½, you’ll be taxed on the full balance of your account—and you’ll have to pay an additional 10% early withdrawal penalty. 

The SECURE Act of 2019 

• The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 made it so you can withdraw up to $5,000 penalty-free from your 401(k) following the birth or adoption of a child. 

• The SECURE Act also made it possible to withdraw up to $10,000 in the lifetime of each beneficiary to pay off costs of apprenticeship and student loan payments.

• (Read more on how the SECURE Act changed 401(k) withdrawals here.)

Is borrowing from your 401(k) the most efficient way to access cash? 

Probably not. Your money may be worth more over time—and withdrawing now can offset gains you’ve made. Remember, the strongest savings tool you have is time in the market. Before you withdraw or borrow from your 401(k), it’s important to weigh your options:

• Explore other ways to borrow money, including home equity and personal loans.

• Check with your 401(k) plan administrator if your plan allows loans in the first place.

• Consult your financial advisor for personalized guidance and advice.

Additional Resources

• Human Interest Learning Center: Should I Take a $100,000 Loan from My 401(k)?

• IRS: Hardships, Early Withdrawals and Loans

• Debt.org: 401(k) Loans: Should You Borrow From Retirement?