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If your retirement plan allows loans, you can usually borrow money from a 401K, TSA or other defined contribution retirement plan very quickly. However, it is advisable to consider all your other options for accessing cash, and the consequences of each alternative, before moving forward with a loan. All in all, while there are advantages to borrowing from a retirement plan, borrowing from your retirement plan is one of the last options you should consider for accessing cash. We describe a variety of alternatives in the following articles. 

As you'll see, one of the ways is to look at your assets to see if there are new uses that would provide you money now. For instance, it may be possible to borrow against or even sell your life insurance policy (a sale is known as a "Viatical Settlement" or "Senior Settlement"). You may be able to take out a home-equity loan or reverse mortgage on your home.

If you do borrow from the plan, the transaction is fairly easy. Read the paper work carefully. If you're borrowing a small amount, keep in mind that even a small fee may equal a large percentage of the amount you want to borrow - plus there's interest to pay.

Advantages & Disadvantages To Borrowing From Your Retirement Plan

Let's take a look at some of the pluses or minuses associated with borrowing from a retirement plan:



You can usually receive the money within a week or two.

The loan must be paid back within 5 years unless it's used to buy a house.

You can borrow up to 50% of the vested balance of your account, up to $50,000.

You cannot borrow small amounts - usually less than around $1,000.

The rate on the loan is usually reasonably low. Also, there is no penalty for the withdrawal as long as it's paid back on time.

You must pay interest. The interest you pay on the loan is paid with after-tax dollars, and will be taxed AGAIN when you take a distribution from the plan.

You can usually borrow for any reason.

You lose tax-deferred growth on the money that you've taken out of the account.


You will have to pay a loan-processing fee. On a small loan, the fee can be a large percentage of the amount borrowed on top of the interest you have to pay.

What Happens With A Loan If You Leave Your Job

If you borrow from your plan and then leave your job, your employer can, and usually will, demand full and immediate repayment of the loan.

If you can't repay entire amount outstanding, your loan will be treated as a distribution and you will have to pay taxes on the distribution plus a 10% penalty on the amount borrowed for the year during which the loan is not paid back as demanded. If you can't pay the tax, it will be deducted from your account. 

Borrowing Compared To A Hardship Withdrawal

If you can meet one of the requirements for a Hardship Withdrawal, it is advisable to consider that option before borrowing.  The money you take out under the hardship provisions does not have to paid back so you'll avoid interest payments.  Note that under many plans, you cannot a take hardship distribution unless you can prove you have tried all other ways to get the funds, including taking a loan from your plan.

How To Take A Loan From Your Retirement Plan

If you decide after considering the consequences and alternatives that you want to go ahead with a loan, the process is usually very simple. 

Call the plan's customer service number.  The representative will tell you how much you can borrow, at what rate of interest, with what fees, and what the monthly payment will be.  The representative you speak to will then send you a promissory note for you to sign and return. (A Promissory Note is a legal document spelling out the loan to you, interest and when it's payable, the repayment terms, and often states what happens in the event of a default.) 

If you need the money very quickly, ask the representative to fax or email the form to you. Also consider returning the form by an overnight service such as Federal Express or delivering it yourself if it goes to a local address.

Read all the documentation carefully, even the small print. If you have difficulty reading or understanding the documentation, have a qualified friend or family do it for you. Or reach out to a Financial Planner or an attorney. If money is difficult, perhaps your local disease specific nonprofit can direct you to a source to review the documentation with you.

Beware high "loan-processing" fees on 401K and other retirement plan loans.  Fifty dollars may not sound like a lot, but on a $1,000 loan that's 5%, not counting the interest that will also be charged.  If the amount you need is small, consider other options first.

Once you've returned the signed promissory note back to the plan, you should have your money in about a week.