Taking Loans From Retirement Plans

Under what Circumstances can I take a Loan from a Qualified Plan?

Taking a loan from a qualified plan such as a 401(k) or employee stock ownership plan is allowed; however, some plans may not allow for it.  If a plan would provide for the ability to take loans, there is a maximum amount which is the greater of $10,000 or 50% of your vested balance or $50,000, whichever is less.  Basically, you can take a loan up to 50% of your vested balance unless your vested balance is less than $20,000. 

It is allowable to take more than one loan but all of these loans in aggregate cannot exceed the cap at $50,000 less the difference betweeen the highest aggregate loan balace in the last 12 months less the current loan balance.  

Let's review an example of a 401k loan:

You have a vested balance in your 401(k) of $75,000 and you take a loan for $30,000 on January 1, 2007.  Also lets assume that the balance of that loan is $25,000 on January 1, 2008.  If you want to take another loan on January 1, 2008, your available loan balance will be $50,000 - ($30,000 - $25,000) or $45,000 minus the existing loan of $25,000.  Therefore, your new loan cannot exceed $20,000. 

Loan Repayment Terms

The loan has a 5 year lifespan and must be repaid in full within that timeframe.  Payments must be made in substantially equal payments and will be made quarterly until the balance is satisfied.

Purchasing a new home which will be a primary residence is an exception to this rule and these loans can be repaid in a period which is greater than 5 years.

Employees who are part of the military may have their loans suspended if they are in the line of duty. 

If a loan is not paid according to the repayment terms, it will be considered a deemed distribution as of the first date where a payment was missed.  A deemed distribution will make the participant responsible for all applicable taxes and early distribution penalties associated.  Even after the loan has been defaulted, it can be reinstantiated by repaying the missed payment and all associated interest that goes with that. 

Tim Ord
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