A. Borrowing from 401(k) for non-retirement purpose is generally not a good idea. Here are a few things you need to consider first before taking out a 401k loan.
Is 401k Loan Allowed by My Employer?
Not every employer allows 401k loans, check with your HR department first. Also, ask if you can take loan on employer contribution part or not. Finally, find out if your employer allows you to take more than one loan at a time or not.
How Much 401k Loan is Allowed?
The IRS limits the 401k loan amount to be either $50,000 or half of your vested balance, whichever is smaller.
How Much Does 401k Loan Cost?
While you are paying the loan back to yourself, the 401k plan administrator must set a "reasonable" interest rate that reflects the prevailing market rate for similar loans, typically at 1% or 2% above the prime rate. The good news is you can borrow even you have bad credit score and the interest rate is not going to increase because of your poor credit score.
How Long the 401k Loan Has To Be Repaid?
Generally, repayment must be within 5 years.
In our next blog post, we will discuss a few risks associated with 401k loans.