The 401(k) Loan
The eleventh episode of our 401(k) season takes on the plan feature that sounds friendliest and can turn sharpest — borrowing from yourself. John, Maria, Melissa and Steve explain what a 401(k) loan really is: a loan from your own vested account under your plan's written loan policy, which your employer is permitted, but not required, to offer. The episode walks through the federal limits in full — the lesser of $50,000 reduced by your highest outstanding loan balance in the prior twelve months, or one half of your vested balance, with the small $10,000 exception some plans use — with worked examples on vested balances of $80,000, $160,000 and $14,000, and the look-back rule that stops a repaid loan from instantly restoring the full limit. It covers the five-year repayment rule, the longer term a plan may allow for a principal residence, level payments at least quarterly and in practice by payroll deduction, and a reasonable interest rate, commonly prime plus one or two points, with a full worked example: $15,000 for five years at eight and a half percent is about $308 a month and about $3,465 in interest paid back into your own account. The hosts weigh the honest costs — money out of the market earning only the loan rate, fees, a smaller paycheck that can squeeze out contributions and the employer match, and the precise double-taxation answer, that the principal is not meaningfully taxed twice but the interest, paid with after-tax dollars into a traditional account, is taxed again on withdrawal. They explain the two bad endings in detail: a default while still employed, the cure period, and a deemed distribution that is taxed without cancelling the loan; and leaving a job with a loan outstanding, the short repayment window many plans impose, the plan loan offset, and the rollover window that now runs to your tax filing deadline including extensions. A clearly labelled invented case study follows two coworkers at a fictional Pennsylvania company: Daniel, who borrows $18,000 for a roof, repays faithfully for eighteen months, then loses his job in a restructuring with $13,419 still owed and faces roughly $4,294 in federal tax and penalty on the offset; and Priya, who borrows $9,000 over three years, protects a reserve, and repays in full when she changes jobs. Plus an honest comparison with savings, negotiated payment plans, personal loans, home equity and credit cards, the purposes that strengthen or weaken the case, home purchase and leave-of-absence rules, a ten-step borrower checklist, and nine traps. Education only — no recommendations, no predictions.
Sources referenced (public, dated): Internal Revenue Service — guidance on retirement plan participant loans, loan limits, repayment periods and plan loan offsets on irs.gov, including the rollover period for plan loan offsets following separation from service; U.S. Department of Labor, Employee Benefits Security Administration — participant education materials on workplace retirement plans and plan loan provisions in summary plan descriptions; U.S. Securities and Exchange Commission, Investor.gov — educational materials on saving and investing for retirement and the risks of borrowing from a retirement account. Plan loan availability, limits, fees, interest formulas and separation rules vary by employer and are described in general educational terms; listeners should read their own plan loan policy and summary plan description, which govern their own accounts. The case study and worked examples are invented and illustrative; the arithmetic examples are teaching calculations using stated hypothetical assumptions, not forecasts.
Audio format: MP3, 128 kbps CBR, 44.1 kHz, mono, -16 LUFS.
This episode is for financial education only and is not investment advice. Narration is AI-generated.
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