How Long Does It Take to Get a 401(K) Loan Direct Deposit?

A well-funded retirement account can be a safety net in times of emergencies. Ideally, you don’t want to tap into your retirement funds. However, in desperate times, a 401(k) can act as an emergency fund by taking out a 401(k) loan. Knowing how long it takes to get a 401(k) loan and have the funds direct deposited into your account can help you plan ahead should you ever need one.

The 401(k) loan process can anywhere from a day if you do it online to a few weeks if done manually. Once completed, it may take two or three days for a direct deposit to reach your account.

Before relying on a 401(k) loan to fund an emergency or any other large purchase you may need it for, there are many things to keep in mind.

401(k) loan basics

When considering whether to take out a 401(k) loan, you’ll need to know the loan terms your 401(k) plan’s administrator sets. Most 401(k) details can be found in the summary plan description. A 401(k)’s SPD should be readily available on your 401(k) plan’s online portal. However, your 401(k) administrator must give you a copy whenever you ask for one.

In your summary plan description, you’ll find details like vesting schedules, eligibility requirements, and yes, 401(k) loan terms.

IRS guidelines require 401(k) loans to be repaid within five years. Also, a 401(k) loan cannot be larger than $50,000 or 50% of the 401(k) balance, whichever is less. The loan’s interest rate will be set by the 401(k) plan and may vary based on your individual situation.

Also, what happens to the loan if you leave the company will be outlined in the summary description plan as well.

What happens if you default on a 401(k) loan?

If a 401(k) loan defaults, the IRS considers the loan to be an early disbursement. The amount that hasn’t been repaid will be subject to income tax and a 10% penalty tax.

If you have spent the entire amount to fund whatever you took the loan out for, the amount the IRS will require will need to be paid out of pocket.

Plan ahead

It’s essential to know the basics and potential costs of a 401(k) loan before considering it an option—ensuring you don’t create an even bigger financial problem before taking out a 401(k).

Another consideration to make ahead of time is how long the 401(k) loan process will take. If you need the funds quickly, you may have better options elsewhere.

Depending on your 401(k) administrator and the process you take to secure a 401(k) loan, it can take anywhere from a day or two to several weeks. If your plan allows it, applying online can result in a much quicker turnaround time. Conversely, if you go the route of working with a person, filing paperwork, and having people review and process your loan can add significant time to the process.

Once your loan is approved and finalized, you can opt to receive your funds in two ways. You can have the funds sent to you via check, which could take additional several weeks for the check to be drafted and mailed to you. Or you can opt for a direct deposit. Depending on your bank, a 401(k) loan direct deposit will take about two or three business days for the funds to reach your bank account.

Before going through the 401(k) loan process, talk to your plan’s administrator to figure out the quickest and most efficient way to get a 401(k) loan. This will help determine if a 401(k) loan is a worthwhile option for your specific situation.

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