Company retirement plans, such as a 401k, are popular financial instruments used to build up a nest egg and are part of the benefits a full-time employee receives. But if you find yourself in a financial bind, you may need to pull some of your money out. One way to do this without a penalty is to take out a loan from your retirement assets, which you'll repay with interest. However, your company plan may have restrictions on the amount of money you can withdraw.
Be prepared to explain the reason for the loan. Some plans only allow you to withdraw funds for hardship reasons.
Determine how much you need to borrow and when you can pay it back. You will be responsible for paying the money back even if you leave the company.
Contact the administrator of your company's retirement plan. Ask what the process is for taking out a loan from the plan. Some companies place limits on the amount you can borrow, and most don't allow you take out more than 50 percent of the vested value. This varies by company.
Review all penalties with the plan administrator. Be sure you understand them thoroughly.
As an example, let's say you have an account balance of $100,000 in your employer's profit-sharing plan, and $50,000 represents your vested balance. Multiply the vested balance by 50 percent. This $25,000 is the amount you can borrow. But if the company has a $20,000 limit on the amount you can borrow, you can only take out $20,000 of the $25,000.
- Internal Revenue Service. “Retirement Topics - Plan Loans.” Accessed July 10, 2020.
- Internal Revenue Service. “Retirement Plans FAQs regarding Loans.” Accessed July 10, 2020.
- Internal Revenue Service. “401(k) Plans.” Accessed July 10, 2020.
- Internal Revenue Service. “401(k) Resource Guide - Plan Participants - General Distribution Rules.” Accessed July 10, 2020.
- The Retirement Plan Company. “Under the New Tax Law.” Accessed July 10, 2020.
- Internal Revenue Service. “Relief for taxpayers affected by COVID-19 who take distributions or loans from retirement plans.” Accessed July 20, 2020.
- IRS. "Relief for taxpayers affected by COVID-19 who take distributions or loans from retirement plans." Accessed Jun. 22, 2020.
- U.S. Congress. "H.R. 748." Accessed Jun. 22, 2020.
Working as a full-time freelance writer/editor for the past two years, Bradley James Bryant has over 1500 publications on eHow, LIVESTRONG.com and other sites. She has worked for JPMorganChase, SunTrust Investment Bank, Intel Corporation and Harvard University. Bryant has a Master of Business Administration with a concentration in finance from Florida A&M University.