How To Apply for a 401k Loan
Agent Only to Guide Advisors
- Make sure Advisor has successfully logged in to Vision 2020 portal.
- Have them navigate to the new requests page and select "Other" request type
- They'll now be able to initiate a 401k loan request
- They will have to fill out the documents and then send them over to their client via Docusign
- The client will need to acknowledge and accept all the terms.
- Once the paperwork is complete, submit the request for review. This process should only take 3-5 business days.
The following information is meant to be provided by the advisor to their client when reviewing whether a 401k loan is right for them
Guidance for Clients: Key takeaways
- Explore all your options for getting cash before tapping your 401(k) savings.
- Every employer's plan has different rules for 401(k) withdrawals and loans, so find out what your plan allows.
- A 401(k) loan may be a better option than a traditional hardship withdrawal, if it's available. In most cases, loans are an option only for active employees.
- If you opt for a 401(k) loan or withdrawal, take steps to keep your retirement savings on track so you don't set yourself back.
401(k) withdrawals vs. loans: Look at the pros and cons
401(k) withdrawals
Depending on your situation, you might qualify for a traditional withdrawal, such as a hardship withdrawalOpens in a new window. IRS considers immediate and heavy financial need for medical expenses, foreclosure, tuition payments, funeral expenses, costs (excluding mortgage payments) related to purchase and repair of primary residence. Also, some plans allow a non-hardship withdrawal, but all plans are different, so check with your employer for details.
Pros: You're not required to pay back withdrawals and 401(k) assets.
Cons: If you take a hardship withdrawal, you won't get the full amount, as withdrawals from 401(k) accounts are generally taxed as ordinary income. Also, a 10% early withdrawal penalty applies on withdrawals before age 59½, unless you meet one of the IRS exceptions.
401(k) loans
With a 401(k) loan, you borrow money from your retirement savings account. Depending on what your employer's plan allows, you could take out as much as 50% of your savings, up to a maximum of $50,000, within a 12-month period.
Remember, you'll have to pay that borrowed money back, plus interest, within 5 years of taking your loan, in most cases. Your plan's rules will also set a maximum number of loans you may have outstanding from your plan. You may also need consent from your spouse/domestic partner to take a loan.
Pros: Unlike 401(k) withdrawals, you don't have to pay taxes and penalties when you take a 401(k) loan. Plus, the interest you pay on the loan goes back into your retirement plan account. Another benefit: If you miss a payment or default on your loan from a 401(k), it won't impact your credit score because defaulted loans are not reported to credit bureaus.
Cons: If you leave your current job, you might have to repay your loan in full in a very short time frame. But if you can't repay the loan for any reason, it's considered defaulted, and you'll owe both taxes and a 10% penalty if you're under 59½. You'll also lose out on investing the money you borrow in a tax-advantaged account, so you'd miss out on potential growth that could amount to more than the interest you'd repay yourself.