401(k) Loans

Why can’t I borrow from my 401k?

When you apply for a 401(k) loan, the plan administrator may deny the loan for various reasons. Here is why you can't borrow from 401(k).

3 min read

If you have a mountain of bills and you are running out of budget, it might make sense to borrow from your 401(k). The IRS allows 401(k) participants to tap into their 401(k) for a loan, and make periodic loan payments over a defined period. If your employer allows 401(k) loans, your loan application may be rejected for various reasons.

Some of the reasons why you can’t borrow from your 401(k) include lack of spousal consent, you are nearing retirement, you have exhausted your 401(k) loan limit, you are no longer working for the employer, or if your job position is at risk due to ongoing restructuring. Also, the plan administrator may deny you a 401(k) loan if the expense is not a qualified expense.

Reasons why you can’t borrow from 401(k)

The 401(k) plan may reject your 401(k) loan request for various reasons. Here are reasons why your 401(k) loan may be denied:

You are about to retire

If you have a year or two remaining before retirement, the plan administrator may deny you a 401(k) loan. Usually, most 401(k) loans have a repayment period of five years, and if your loan is approved, the repayment period could stretch to the period after retirement.

Once you retire, you will be solely responsible for making timely loan payments, and this increases the risk of default. Once your name is struck out of payroll, your employer cannot make payroll deductions to repay the loan. Hence, your employers will reject your 401(k) loan request to avoid the risk of loss.

You have exhausted your loan limit

Generally, you can borrow a maximum of $50,000 or half of your vested balance. If you already have an old 401(k) loan that you are paying, you can only be allowed to take a second 401(k) loan if you have not exhausted your loan limit.

For instance, if your vested balance is $80,000, it means you can only borrow up to $40,000. If you borrow $40,000 in the first loan, you won’t be allowed to take a second loan since you already exhausted your loan limit.

Also, some 401(k) plans may not allow multiple 401(k) loans at a time. If you want to take a second 401(k) loan, you must first pay off the loan fully and wait up to 6 to 12 months before reapplying for a new loan.

You quit your job

Once you leave your employer, you won’t be allowed to tap into your old 401(k) account left with the former employer. However, you may be allowed to cash out your old 401(k) or rollover the 401(k) into an IRA or other retirement account.

Fortunately, Beagle has an exclusive service that allows retirement savers to borrow against their old 401(k)s. We unlock your old 401(k)s so that you can borrow from them at 0% net interest. Any interest on the loan is added back to your 401(k) account.

The spouse did not consent to the loan

Though not mandatory, some companies may require spousal consent to approve a 401(k) loan above a certain threshold, usually $5,000.

If your employer requires spousal consent to approve a loan, they will include a spousal consent form as part of the 401(k) loan documentation. The spouse must fill this form, and it should be returned alongside your loan application paperwork.

If you return the loan application paperwork without the spousal consent form, the plan administrator will reject the 401(k) loan application. Since a 401(k) is considered marital property, plan administrators may require spousal consent to avoid legal tussles.

Non-qualified expense

Some 401(k) plans may restrict 401(k) loans to specific qualified expenses. For example, the plan administrator may require participants to prove financial hardships to be approved for a 401(k) loan.

Some of the qualified expenses may include paying medical expenses, paying college expenses, preventing foreclosure on the primary residence, purchase of a first-time home, etc. You may also be allowed to tap into your 401(k) if you have a financial emergency.

However, if you are borrowing to pay for luxuries such as a vacation, the plan administrator may reject the loan application since the expense is a non-qualified expense. You can check the plan documentation or ask the plan administrator to know what expenses are considered qualified expenses.

Job restructuring

If the company is going through a restructuring, it will change the nature and responsibilities of employees, which could lead to redundancy.

The reorganization could result in certain departments being shut down, certain job roles being eliminated, and workers being laid off. As such, the 401(k) plan may suspend 401(k) loan approvals until the job restructuring process is complete. If your job position is at risk, your 401(k) loan may be denied due to the uncertainty surrounding your job security.

Do you have to be approved for a 401k loan?

When you apply for a loan, you must be approved for the 401(k) loan before you can receive the funds. Usually, once you send your 401(k) loan application, the plan administrator will review the application to determine if you qualify to borrow from your 401(k) and the amount you qualify to borrow. You can borrow up to 50% of your vested balance, up to a maximum of $50,000.