401(k) Loans

Where to get a 401k loan?

If you have a short-term financial need, you could consider tapping into your 401(k). Find out where to get a 401(k) loan.

3 min read

If you have been contributing to a 401(k) plan, you might be able to take a 401(k) loan. You can take a 401(k) loan to buy a business, pay down payment for your primary residence, or make a big purchase. If your 401(k) plan has a loan provision, it is a better alternative to an early withdrawal that has tax implications. A 401(k) loan is not subjected to a credit check, and you can get approved in a few days.

You can get a 401(k) loan directly from the 401(k) plan. Start by contacting the plan administrator to find out the process of getting a 401(k) loan. Usually, you may be required to file an online application indicating the amount of loan you are applying for and the purpose for which the funds will be used. If the plan administrator approves the loan, you should expect to receive the funds in a few days.

Steps to get a 401(k) loan

If you need emergency funding, you can use the following steps to get a 401(k) loan:

Talk to the Plan Sponsor

The first step is to find out if your employer allows employees to take 401(k) loans. You can talk to the benefits office or the human resource representatives to know the process of taking a 401(k) loan. You could also find information in the plan documents to know the 401(k) loan rules.

Know the 401(k) loan terms

The government sets rules on how much a 401(k) participant can borrow against their retirement savings. You can borrow up to 50% of the account balance, up to a maximum limit of $50,000. However, the plan may impose its own rules, including limiting the minimum loan amount that participants can borrow. Ask the plan sponsor how much you qualify to borrow, the loan interest, and the repayment period for the loan.

Fill required paperwork

If you are comfortable with the 401(k) loan terms, you can go ahead with the loan application process. Most 401(k) plans allow participants to fill an online form to request a loan. When filing the loan application form, you should review the terms and conditions of the loan to make sure you are aware of what you are getting into.

401(k) loan disbursed

Once the loan is processed, the plan sponsor will release the funds. You can expect to receive the loan either as a mailed check or as a direct deposit in your bank account. The 401(k) plan may disburse funds in a few days after approval, or during the next pay period.

Start making loan payments

You will be required to make loan payments starting from the next pay period. The loan payments will include the principal and interest components of the loan, and they will be deducted automatically from your paycheck.

As long as you are an employee of the company, the employer will deduct the loan payments every pay period until you pay off the loan. If you leave the job and you have an unpaid loan, you will be required to make loan payments via check before the next tax due date.

Keep contributing

When you take a 401(k) loan, the loan amount is deducted from your account balance. This means that you are depriving your money of tax-deferred growth. You can fill this gap by maintaining regular 401(k) contributions while repaying the loan.

Can You Take Multiple 401(k) Loans at a Time?

Each 401(k) plan has its rules, and some plans may allow participants to take multiple 401(k) loans at the same time. Generally, if your 401(k) plan allows multiple loans, you can take a second loan while still repaying the first loan, but the total loan amount should not exceed the maximum loan limit.

For example, if you have $80,000 in your 401(k), you can only borrow up to $40,000. If the 401(k) plan allows multiple 401(k) loans at a time, and you had borrowed $30,000, you can take a second 401(k) loan of no more than $10,000.  

Can an Employer Deny You a 401(k) Loan?

If your employer allows 401(k) loans, you may be allowed to tap into your retirement money. However, there are situations when the employer may deny you a 401(k) loan even if you qualify. Common reasons why an employer may deny you a 401(k) loan include:

You are retiring

If you are approaching retirement, you could be denied a 401(k) loan if the repayment period extends post-retirement. Once you’ve retired, you will no longer receive periodic paychecks, and this means the employer cannot deduct loan payments from your paycheck. Therefore, the employer will deny you the 401(k) loan to avoid the risk of default.

You have given the notice to resign/quit

If you have given the notice to resign from the company, you may be denied a 401(k) loan. Depending on the amount of the loan and the repayment duration, the repayment period may stretch beyond the time you will be working in the company, and you could be responsible for loan repayment. This opens doors for default, and the employer may deny you a 401(k) loan to protect itself from loss.