How much can you take as a loan from your retirement plan?

By | February 18, 2015

Many retirement plans offer loan options that taxpayers can tax advantage of. The most you can borrow from your plan is 50 percent of your vested account balance but no more than $50,000.00, whichever is less.



How much can you take as a loan from your retirement plan?

Plans can have a lower loan limit but not a higher one. And some plans allow you to take a loan of $10,000.00, even if that’s more than 50 percent of your account balance. Plans aren’t required to allow this exception, and most don’t. If your plan allows loans that are more than 50 percent of the account balance, that is the $10,000.00 exception, then the employee will have to find another way to secure the loan. Unsecured loans are not allowed.


How long do you have to repay the loan?

Generally, you must repay it within five years. However, if the loan is for the purchase of your main home, it can be up to 30 years. The repayment terms, length, frequency of payment and the method for determining the interest rate, must be in a legally enforceable agreement. No oral agreements are allowed. Many loan agreements are in an electronic form nowadays. Your loan must require substantially equal payments, at least quarterly, that includes both principal and interest. You’ll find that most plans require payments to be made by payroll deduction. A weekly payroll normally means a weekly loan payment.


401k Plan Loans

The plan has to use a reasonable rate of interest for loans. The determination of what “reasonable” is is made based on the facts and circumstances. You might consider, for example, interest rates charged by local banks for a similar secured loan. With interest rates, the main issue we find on our audits is that rank and file employees are charged a higher rate than the rate for the highlypaid employees. You may be asking yourself, “Can the plan charge a fee for a loan?” And the answer is “yes, but within limits.” For example, the federal government’s Thrift Savings Plan charges participants a $50.00 fee for a loan. Also, in the case of military personnel, the loan repayment can – but does not have to be – suspended while the participant is in military service. Interest continues to accrue during any repayment suspension.


Paying back 401k Loan Rules

Now, if the plan doesn’t provide for in-service distributions, the defaulted loan is considered a deemed distribution. In that case, a Form 1099-R is going to be issued with box 7 codes of “L” and “1” for participants under 59 ½; “L” and “2” for participants that are over 59 ½. A deemed distribution isn’t offset from the participant’s account, and this unpaid amount will be recorded as an outstanding loan on the plan’s books until the distribution can occur under the terms of the plan.