It depends, you will need to check with your plan representative. Not all plans allow loans to participants. Loans require your employer to administer loan applications, repayments and defaults. Not all employers are willing to do this.

If your Plan allows for loans, it has a specific loan policy which explains how loans in your plan operate. In addition to your Plan’s requirements, there are many legal restrictions on loans. Your Plan may allow you to borrow for any reason. But, on the other hand, some plans allow loans only if you have a financial hardship as defined by the IRS:

• Unreimbursed medical expenses
• Purchase or rehabilitation of your primary residence
• College tuition/room and board
• Amounts necessary to prevent eviction

Loans are non-taxable distributions, which must be repaid. Generally, loans have to be repaid in quarterly installments within five years by payroll deductions. Most loan policies require full repayment when you leave employment. You should understand your Plan’s loan policy before you borrow.

The law dictates that participant loans meet many requirements. The law mandates that loans must –

• be available to all participants on a reasonable basis,
• not be more than the legal maximum,
• be secured by the participant’s vested interest in the plan,
• charge a reasonable rate of interest,
• be repaid in level installments, and
• be repaid over five years or less, unless made for principal residence.

As you can see there are numerous requirements loans must satisfy. Therefore, you should review your Plan’s loan policy closely before you borrow.

Keeping your money tax-deferred should be your most important objective.

A hardship withdrawal is subject to regular income tax (at your highest tax rate because it is added on top of your other income and also subject to a 10% penalty for early distribution (if you’re less than age 59½). If you were to take a $30,000 hardship withdrawal and paid 30% federal and state tax ($9,000) and a 10% penalty ($3,000), you would only net $18,000. It would be much better to borrow $18,000 from your account and repay it to yourself.

By repaying the loan, you climb back-up on the “retirement savings curve” which keeps and restores your savings and allows you to have more for your retirement.

 It seems so simple to take out a loan from the plan. But, you should review the following pros and cons before taking a loan -

 Pros

• No bankers – no credit checks – no personal collateral needed.
• Competitive interest rate (e.g. prime + 1%).
• The interest you pay is paid back to your own account.
• Repayments are automatically deducted from your paycheck.
• It’s so simple.

 Cons

• Loan fees are usually $50 - $75 to apply and a monthly fee thereafter.
• You’re really not borrowing anything. You’re using your own money.
• By reducing your account, the borrowed monies are not invested, and are not working for you.
• The interest you pay is not tax-deductible.
• If you quit or are fired, you must repay the loan immediately.
• If you don’t repay the loan, it is considered a taxable distribution and subject to penalty taxes if you are less than 59 ½.
• It is too easy “to get in the habit” of borrowing small amounts.

Protect your retirement savings and don’t get into the borrowing habit. Keep your 401(k) Plan loan free to build up more money for your retirement.

If your plan allows for loans, it also can establish the loan limits but most plans use the rules dictated by the government to calculate the maximum loan amount.

Legally, you can borrow up to one-half of your vested account balance. However, there is also a dollar maximum which limits any loan to $50,000 less the largest loan balance you’ve carried in the last 12 months.

For example, if your account looked like the following:

Source of Money	Account Balance	Vested %	Vested Balance
401(k) Employer Match	$10,000    2,500 $12,500	100% 40%	$10,000    1,000 $11,000

The maximum you could borrow is $5,500 (i.e. ½ x $11,000).

If your highest loan balance during the last 12 months was $10,000 and your account balance looked like the following:

Source of Money	Account Balance	Vested %	Vested Balance
401(k) Employer Match	$100,000    25,000 $125,000	100% 100%	$100,000    25,000 $125,000

The maximum you could borrow is $40,000, the smaller of (a) or (b):

(a)         $50,000 – highest loan =$50,000 - $10,000 = $40,000

(b)      ½   x $125,000 = $62,500

Remember your loan policy may provide additional restrictions besides these legal limits, such as, not allowing loans from company stock accounts.

Borrowing from your 401(k) Plan is literally borrowing your own money. If you borrow part of your account, your 401(k) investments are sold to get the necessary amount you’ve requested. Therefore, because you have less money invested in the Plan your earnings will be less. On the other hand, because the loan must be repaid, you pay yourself back - both principal and interest on the loan through payroll deduction. The interest you pay is not tax deductible.