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401k Loans

401k Loans

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Borrowing money from yourself can be easy, but is not without risk.

Many 401k plans offer participants the option of taking a loan from their vested account balance. Some plans will allow loans for any purpose, while others may restrict use to paying medical or education expenses, to prevent home foreclosure, or to finance a first home, additionally spousal consent and automatic payment via payroll deduction are sometimes required. Loans are available for up to 50% of your vested balance or $50,000, which ever is less and must be repaid with interest within 5 years, excepting borrowing for a first home where additional time may be allowed.

On the downside, your debt must be quickly repaid upon leaving your job to prevent defaulting. Defaulting on a 401k loan will incur the same penalties as a 401k early withdrawal: income tax and a 10% penalty.

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