401(k) Loans

When can I take another 401k loan?

If you have an unpaid 401(k), you may qualify to take another 401(k) loan. Find you when you can take a second 401(k) loan, and how it is calculated.

3 min read

If you are pressed for cash, you may consider borrowing from your 401(k) instead of taking a bank loan. Although not all employers allow 401(k) loans, you should check with your plan to see if it allows 401(k) loans. You can borrow 50% of your vested balance up to $50,000. Some 401(k) plans allow participants to borrow more than one loan as long as the total amount borrowed is within the IRS limit.  

If you have an existing 401(k) loan, you can take another 401(k) loan at any time based on the highest outstanding balance in the previous 12 months. However, if you have exhausted your 401(k) loan limit, you must wait until the lapse of the 12-month rolling period to take a second loan. For example, if you took the loan in December, you must wait until the following year’s December to take a second 401(k) loan. 

IRS 401(k) Rules

The IRS allows 401(k) plans to give loans to the plan participants but based on certain rules. One of these rules is that 401(k) participants cannot borrow more than half their vested balance or $50,000, whichever is less. For example, if you have a vested 40(k) balance of $200,000, half of this account balance is $100,000. However, since this amount exceeds the maximum allowed 401(k) loan, you can only borrow up to $50,000.

Usually, participants must pay off the entire loan within 5 years, except in limited circumstances such as borrowing to buy a home where you may be allowed a longer repayment period. Although the IRS sets the 401(k) loan rules, the 401(k) plan may have its own rules on 401(k) loans. The plan may fix a lower 401(k) loan limit, limit borrowing to one loan for each period, or even choose not to allow 401(k) loans.

401(k) loan limit

The IRS allows participants to borrow the lower of 50% of the vested account balance or a maximum of $50,000. If you have an existing 401(k) loan that you are still paying, you may be allowed to take a second loan as long as the total of both loans does not exceed the IRS loan limit. The IRS places limitations on the amount you can borrow on a 12-month rolling period, even if you repay the entire first loan within the 12-month period.

How Much Can You Borrow as a second 401(k) loan?

If your 401(k) plan allows multiple 401(k) loans, and you have an existing 401(k) loan, you must figure out how much you may be allowed to borrow as a second loan. Generally, the second 401(k) loan will depend on the highest outstanding balance in the previous 12-months, regardless of how much you have paid in loan payments.

Start by calculating the difference between the highest 401(k) loan balance in the last 12-months, and the 401(k) loan balance on the date you want to take a second loan. Deduct the result you get from the maximum 401(k) loan you can borrow from your 401(k) loan. Then, subtract the 401(k) loan balance on the date you want to borrow a second loan to find how much you can borrow.

For example, if your vested balance of $120,000, it means you can borrow up to the IRS limit of $50,000. If the current loan balance is $20,000, and the highest outstanding loan balance in the last 12 months was $28,000, the difference between the two values is $8,000. Deduct $8,000 from the $50,000 to get $42,000. Then, deduct current loan balance of $20,000 from $42,000 to get $22,000. Therefore, $22,000 is the amount you can borrow as a second 401(k) loan.

401(k) Repayment Terms

401(k) plans require participants to make loan payments at least quarterly over the defined repayment period, usually 5 years. The repayment period could be higher if you are borrowing to buy your primary residence. Most of the time, the plan may require borrowers to repay the loan through payroll deductions. If you opt out of payroll deductions, you will be responsible for making loan payments based on the plan’s repayment schedule.

If you leave your job with an unpaid 401(k) loan, you will have to pay off the outstanding balance before the following year’s tax due date. However, if you are unable to pay the loan within the required timeframe, the unpaid loan will be considered a deemed distribution, and you will owe income taxes and a potential 10% tax penalty if you are younger than 59 ½. 

Can You Borrow From an Old 401(k)?

 If you have an old 401(k), we can help you unlock your retirement money, so that you can take a 401(k) loan for your financial emergency. A 401(k) loan has a quick approval process, and you can get approved almost immediately if you have sufficient balance to qualify for a 401(k) loan. The 401(k) loan comes at zero net interest, and you can borrow even with bad credit.