401(k) Loans

What's the maximum 401k loan amount?

If you have a financial emergency, you can take a 401(k) loan as an alternative to an early 401(k) withdrawal. Find out the maximum 401(k) loan amount you can borrow.

3 min read

If your company allows 401(k) loans, you could consider tapping into your retirement savings to meet your financial needs. However, borrowing from your 401(k) is not the best idea, since it could jeopardize your retirement goals. Before taking a 401(k) loan against your accrued benefits, you should understand how 401(k) loans work and the potential drawbacks.

Generally, the maximum 401(k) loan you can borrow is the greater of $10,000 or 50% of your vested balance, up to $50,000. For example, if your accrued 401(k) balance is $150,000, the maximum 401(k) loan you can take is $50,000. If you have not exhausted the maximum loan limit, you may be able to take more than one 401(k) loan at a time.

How much can you borrow from 401(k)?

Most companies allow employees to take 401(k) loans, but there are companies that don’t allow 401(k) loans. If your company allows 401(k) loans, you may be able to borrow up to the IRS limit. You can borrow up to 50% of the total of your contributions and the vested portion of the employer’s contributions.

The IRS imposes lower and upper limits on how much you can borrow from your 401(k). Usually, you can borrow no more than $50,000 if you have a 401(k) balance of $100,000 or more. However, if your accrued benefits fall below $10,000, you can only borrow up to $10,000. Some employers may decide to set lower 401(k) limits for their plans, but these limits should not exceed the maximum amount allowed by the IRS.

An exemption to the IRS limit is the CARES Act during the COVID-19 pandemic, which allowed employees to borrow 100% of their vested balance up to a maximum limit of $100,000, whichever is less.

How Long Do You Have to Repay a 401(k) Loan?

401(k) loans have a repayment period of up to five years, but the repayment period could be longer if you are using the funds to buy your primary residence. The loan payments should be made in substantially equal payments comprising both principal and interest, which can be deducted automatically from your paycheck. Also, you can decide to make the loan payments monthly or quarterly.

If you are using the loan proceeds to buy your principal residence, you may be allowed a repayment period of more than five years. The repayment period will depend on the amount of loan you borrow.

How Much Interest Do You Pay on 401(k) Loans?

When you request a 401(k) loan, the loan application is not subject to credit checks, hence, your credit score will not affect your 401(k) loan interest rate. When setting the interest rate, 401(k) plans add one or two points to the prime interest rate. For example, if the prime interest rate is 5%, the 401(k) plan can charge an interest rate of 6%.

Unlike a bank loan, the 401(k) loan interest is paid back to your 401(k) account. Therefore, you will be paying back a little more to your retirement account, instead of paying the interest to a bank.

How Much Can I Borrow as a Second 401(k) Loan?

IRS rules allow 401(k) participants to have two 401(k) loans at a time, as long as the total loan amount does not exceed the maximum loan limit. When evaluating how much a participant can borrow as a second loan, the employer considers the highest outstanding loan balance during the previous 12 months ending on the day before the second loan is issued. The total outstanding balance for both loans should not exceed $50,000, or 50% of the vested loan balance.

For example, assume that Mary has a vested balance of $98,000. She has an outstanding 401(k) loan balance of $5000, and the highest outstanding balance in the last 12 months was $10,000. When calculating the second 401(k) loan, the maximum allowed amount depends on the highest outstanding balance in the previous 12 months. If Mary plans to take another 401(k) loan, she qualifies to get $40,000 ($50,000-$10,000) i.e. Maximum 401(k) loan limit – highest outstanding balance in the last 12 months.

Alternative to 401(k) Loan: Hardship Withdrawals

If you need urgent cash for financial hardship, you may consider taking a hardship withdrawal from your 401(k) account. Unlike a 401(k) loan, you won’t be required to repay the money you take from your retirement account. However, you will be required to pay income tax and penalty on the hardship withdrawal, but you could be exempted from paying the 10% early withdrawal penalty.

IRS rules require that you cannot withdraw more money than you actually need for a specific financial need. You can take a hardship withdrawal to pay college fees, funeral or medical expenses, prevent foreclosure of your primary residence, or remodel your primary residence.