Should you borrow against your 401(k) before you retire?

Carefully weigh the pros and cons before taking out a loan against your 401(k).
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If you need cash for an unexpected expense, it may be tempting to turn to your 401(k) for a loan, especially if you have built up a significant amount of savings. But borrowing against your 401(k) can have long-term implications for your retirement goals. 

If you’re considering a 401(k) loan, talk to your Ameriprise financial advisor first. They can help you evaluate your options and make an informed decision that considers the short and long-term impacts on your retirement savings and your overall financial goals.  

Here are answers to frequently asked questions about borrowing against your 401(k):

Can I take out a loan against my 401(k)? 

Check with your plan administrator to find out if 401(k) loans are allowed under your employer’s plan rules. Not all employers allow loans as part of their plan offerings. 

How do 401(k) loans work? 

A 401(k) loan allows you to take out a loan against the assets in your employer-sponsored plan, which means you’re essentially borrowing money from yourself. While you’ll pay interest similar to a more traditional loan, the interest payments go back into your own account. However, even though you’re borrowing your own retirement money, there are certain rules you must follow to avoid penalties and taxes. 

 

Learn more: How to use your assets for financial flexibility 

Under what scenarios can I borrow against my 401(k)? 

While some plans only allow participants to take a loan for certain approved reasons, in most cases you will not need to declare why you are borrowing against your 401(k). You can generally borrow against your 401(k) for a variety of reasons, such as funding the purchase of a house or paying for a dependent’s college tuition. 

Can I borrow against an old 401(k)? 

No, you cannot borrow against a 401(k) that is held with a previous employer. 

What are the pros and cons of taking a loan from my 401(k)? 

Here are some of the benefits and risks of a 401(k) loan:  

Pros 

Cons 

Process is generally quick and easy. 

The money removed from your 401(k) will not be able to grow and will not benefit from the effects of compound interest. 

 
If you follow the loan repayment rules,  
you won’t be subject to taxes or penalties on the loan amount. 

 
If you don’t follow the repayment rules, you may be subject to taxes and penalties. 

 
You don’t need a credit check, and your credit won’t take a hit if you default. 

 

 
If you lose (or leave) your job while the loan is outstanding, you typically will have to repay the full amount within 60 days. 

 
Interest paid on the loan is not lost to a lender, because you are the lender. 
 

 

 
You must replace the money you borrowed with post-tax dollars. 

 
There are no early repayment penalties if you pay off the loan early. 

 
You can’t deduct loan interest payments for tax purposes. 

How much can I borrow from my 401(k)? 

Under IRS rules, you can borrow up to 50% of the vested value of your account, up to a maximum of $50,000 for individuals, provided you have $100,000 or more vested. If your account balance is less than $10,000, you will only be allowed to borrow up to $10,000. Different plans can have different rules, however, so check with your plan administrator. 

If you have this much vested in your 401(k) … 

Standard rules allow you to borrow up to this much …  

$100,000 or more 

$50,000 

$10,000 to $100,000 

50% of your vested value 

$10,000 or less 

$10,000 

How often can I borrow from my 401(k)? 

Most employer 401(k) plans will only allow one loan at a time, and you must repay that loan before you can take out another one. Even if your plan does allow multiple loans, the maximum loan allowances, noted above, still apply. 

What are the repayment terms for a 401(k) loan? 

You must repay the loan within five years and will need to make regularly scheduled payments that include both principal and interest. If you’re using the loan to buy a primary residence for yourself, however, you may be able to extend the repayment period. 

What if I lose my job before I finish repaying the loan? 

If you leave or are terminated from your job before you’ve finished repaying the loan, you typically have 60 days to repay the outstanding loan amount. 

What if I don’t comply with the 401(k) loan repayment rules? 

Failure to follow the 401(k) loan repayment rules may result in income tax plus a 10% early withdrawal penalty. 

Get help weighing your options 

If you’re considering taking money out of your 401(k), an Ameriprise financial advisor can help you weigh your options and the potential impact on your long-term retirement goals.  

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 I’m considering a 401(k) loan — what should I think about before making my decision? How may borrowing against my 401(k) affect my retirement goals? How do traditional lending options compare to borrowing against my 401(k)?

When you’re ready to reach out to an Ameriprise financial advisor for a complimentary initial consultation, consider bringing these questions to your meeting.

 Client Action: Your client has questions they would like to discuss I’m considering a 401(k) loan — what should I think about before making my decision? How may borrowing against my 401(k) affect my retirement goals? How do traditional lending options compare to borrowing against my 401(k)?

Reach out to %advisor% to start the conversation.

 Client Action: Your client has questions they would like to discuss Hello, I recently read the article %article% on ameriprise.com and I’d like to discuss it with you at our next meeting. Some of the questions I’d like to review are: •I’m considering a 401(k) loan — what should I think about before making my decision? •How may borrowing against my 401(k) affect my retirement goals? •How do traditional lending options compare to borrowing against my 401(k)? Thank you
Withdrawing your retirement funds early https://www.ameriprise.com/financial-goals-priorities/retirement/withdraw-retirement-funds-early How to use your assets for financial flexibility https://www.ameriprise.com/financial-goals-priorities/personal-finance/what-is-asset-based-lending How to maximize your 401(k) investment strategy https://www.ameriprise.com/financial-goals-priorities/retirement/maximizing-401k-investments
Make your 401(k) work for you.

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