The IRS allows active participants to borrow directly from their qualified employer-sponsored plan via a loan. Note that not all qualified retirement plans allow loans, and the ones that do may still exclude certain employees. Contact your plan administrator to determine whether your employer’s plan permits participant loans and whether you satisfy the plan’s eligibility requirements.
Depending on what your employer allows, IRS rules generally limit participant loans to the lesser of 50% of the participant’s vested account balance or $50,000, subject to additional limitations and exceptions under
federal tax law and the plan’s provisions.
You typically must pay back all borrowed funds, with interest, within 5 years of taking out the loan. If the loan is used to purchase a primary residence, full repayment may be extended, subject to the plan’s terms and applicable IRS rules. Your loan will be repaid through automatic deposits directly from your paycheck every pay period.
If you leave your current job with an outstanding loan, you may have to repay your entire loan balance within a very short time frame. Certain plans allow you to continue to repay the loan after you leave the employer. We highly recommend you understand your plan’s details before taking out a loan.
If you miss a payment and fail to repay the owed amount within the grace period (typically 60 days), the remaining loan amount would be classified as a taxable distribution, with this amount being subject to the 10% early withdrawal penalty (if under age 591/2) as well as ordinary income tax.
Loans from a retirement plan should not be used to purchase items that aren’t an absolute necessity.
Before making financial decisions, consider consulting qualified financial, legal, and tax professionals regarding your specific circumstances.
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