You generally can. Many 401(k) plans allow you to borrow up to 50% of your vested account balance, up to a maximum of $50,000, before you retire. Because rules vary from plan to plan, you should check with your plan administrator to be sure. But it might not be a good financial move.
Pros and cons of borrowing from your 401(k) account
Weigh your options carefully before taking out a loan from your 401(k) account.
Pros
- Immediate funds to meet short-term liquidity needs
- Pay interest to yourself rather than to another lender
Cons
- Loss of tax-deferred growth potential on borrowed funds
- Repayments—with interest—are made with after-tax dollars
- Some plans don't allow contributions while repaying the loan
- Possible federal income tax and additional 10% early withdrawal tax on the outstanding balance if you switch employers before paying back the loan and do not roll over the balance
- Possible 10% early withdrawal tax if you don't pay back the loan and were under age 59½ at the time you took it out
If you need money for a large, immediate expense — and you don't have access to other funds — it can sometimes make sense to take out a 401(k) loan. But keep in mind that borrowing from your 401(k) account might be costly in several ways:
- Because the money you borrow will no longer be earning potential tax-deferred growth inside the account, you could potentially be missing out on significant profit.
- You'll have to repay the loan and make interest payments with after-tax dollars.
- Paying off the loan may mean you're unable to contribute as much to your retirement account as you normally would.
- In rare instances, some 401(k) plans won't let you make contributions until the loan is repaid.
Because the money you borrow will no longer be earning potential tax-deferred growth, you could potentially be missing out on significant profit.
It's important to understand the possible effects an early withdrawal could have on your retirement account and your overall finances. As with any financial decision, it's important to educate yourself on the pros and cons of each option before finalizing your plans.
Do I have to pay taxes on a 401(k) loan?
If you leave your employer before the loan is paid off, you may owe federal and state income taxes on the distribution — in addition to a 10% federal tax if you're under age 59½ — unless an exception applies. In 2018, the time period for rolling over outstanding loans to an IRA or a new employer's plan was extended under recent tax reform legislation. You now have until your tax filing deadline (including extensions) for the year in which the loan was distributed to pay off the loan and avoid having it treated as a taxable distribution. Consult your tax advisor if you are considering this option.
How do hardship withdrawals work?
If your employer's plan permits them, you can apply for a hardship withdrawal if, for instance, you're facing eviction or need to pay for certain medical expenses. Your withdrawal will typically be treated as taxable income, and you might not be permitted to make new contributions for a period of time following the withdrawal. You should review the terms of your employer's plan to determine what the impact could have on your contributions. Another consideration: A hardship withdrawal permanently reduces your retirement account balance and gives you no option to repay, which can make it difficult to get back on track with your retirement savings goals.