A 401k plan is a retirement savings vehicle created by companies on behalf of their employees. Typically, money cannot be withdrawn from the account until you reach age 59½ without paying an early-withdrawal penalty, but the Internal Revenue Service permits 401k plans to allow loans, which let you access funds from your 401k plan without a penalty. If you use the loan for your home, the repayment period can be extended.
Contact your 401k plan administrator to determine if your 401k plan allows loans. Though loans are permitted under IRS rules for 401k plans, not all plans allow them. Check to make sure your plan permits loans.
Calculate your maximum 401k loan. The most you can borrow is the smaller of 50 percent of your 401k plan's value or $50,000.
Contact your 401k plan administrator to request a loan. Your plan may require you to fill out a loan request form, and some plans even allow you to request the loan over the phone.
Use the money for the down payment on your home. To qualify for the longer repayment period, the money must be used for your down payment. If it is not, you must repay the loan over five years.
Repay the loan in monthly installments, with interest, over no more than 10 years. The interest rate is set by your 401k plan's rules.
- IRS: 401k Resource Guide
- Wall Street Journal: Borrowing From a 401k to Make a Down Payment
- IRS. "Retirement Topics - Plan Loans." Accessed Nov. 2, 2020.
- FINRA. "401(k) Loans, Hardship Withdrawals and Other Important Considerations." Accessed Nov. 2, 2020.
- IRS. "Relief for Taxpayers Affected by COVID-19 Who Take Distributions or Loans From Retirement Plans." Accessed Nov. 2, 2020.
- Charles Schwab. "The Charles Schwab Guide to Finances After Fifty: Does It Make Sense to Borrow From My 401(k) if I Need Cash?" Accessed Nov. 2, 2020.
- Maxwell Locke & Ritter. "Options for Your 401(K) Plan at a Former Employer." Accessed Nov. 2, 2020.
- IRS. "Retirement Plans FAQs Regarding Loans." Accessed Nov. 2, 2020.
- The Pension Research Council at the Wharton School. "Financial Literacy: Implications for Retirement Security and the Financial Marketplace: Chapter 4: Financial Literacy and 401(k) Loans," Page 71. Accessed Nov. 2, 2020.
- IRS. "Retirement Topics - Bankruptcy of Employer." Accessed Nov. 2, 2020.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."