How to Request a Loan from Your 401(k)

What you need to know about requesting a loan from your 401(k) plan, how a loan works, how long it takes for a loan request to process, and the financial implications of taking a loan from your retirement plan.

Requesting a loan video walkthrough

 

You must currently be employed with the employer sponsoring your retirement plan to take a loan. 

Suppose you have terminated your employment with this employer for any reason. In that case, you can no longer take a loan from the retirement plan, even if you were previously eligible to take a loan while employed.

Steps to Request a Loan

To request a loan, access your Vestwell site under Retirement Overview and select ‘Withdrawals & Rollovers.’ Then choose ‘Take a Loan,’ click ‘Request New Loan,’ and fill in the requested information:

  • Loan Purpose: depends on what your plan allows.
  • Loan Amount: The amount must be between $1,000 and $50,000.
  • Repayment term: Regardless of the number of years selected, payments will be scheduled based on when you get paid.
  • Payment type: Choose direct deposit and add a bank account, or select paper check and confirm your mailing address.

Note: Your plan does not allow loans if the loan option does not appear. In this case, please get in touch with your plan administrator to inquire further.

Once your loan request has been submitted, you will be able to view the following information:

  • loan status
  • loan amount available
  • outstanding loan balance 
  • loans allowed
  • existing loans
  • requested loan balance

You can also cancel a loan request in your portal; however, you can only cancel the request when the loan status shows as "Requested."

Understanding 401(k) Loan Requests

You should know some things about the loan process and the impact of taking out a loan from your 401(k) account.

What is a loan?

A 401(k) loan is a way to borrow against your retirement account while agreeing to repay the balance, plus interest, within a specific timeframe. Loans generally have a term of 1-5 years, although your plan may allow a longer term if you use the loan to purchase a principal residence.

How does a loan work?

Complete and submit the Loan Request form to request a loan from your account. Once you have submitted the form, we will review it. Once the request is approved, we will begin processing it and send the requested amount to the specified destination.

Your loan will then be repaid through payroll deductions. Your employer will withhold a specified amount from your paycheck every pay period and submit it directly to Vestwell until the loan is fully repaid.

What is the timeline for processing a loan request?

If you submit your form in good order, you should have your funds within approximately 10 business days. "Good order" means that you have provided all the necessary information and accurate instructions on where the money should be sent, including correct banking and routing information. Once we receive your request:

  1. We will review plan documents, confirm that your plan allows loans, review your eligibility, request spousal consent (if applicable), and reconcile any discrepancies. This can take up to 5 business days*.

  2. We will sell your investments to generate the requested amount of cash. This generally takes 2-3 days from the day the trade is initiated.

  3. We will issue payment. This takes 2-3 days and is paid to you via ACH. If you ask for a check, it will be sent via regular mail unless you indicate otherwise.

Note: Any discrepancies between the information provided to Vestwell and the information in our records can extend any of these processing times.

How is my available loan amount calculated?

Assuming you do not have any existing loans, you can borrow up to half of your vested account balance, up to a maximum of $50,000. There is a minimum loan amount of $1,000. It gets a little more complicated if you already have an outstanding loan or have had one in the past 365 days. In that case, your maximum allowed loan is the lesser of:

  1. $50,000 - Max Outstanding Balance in the Past 365 Days

  2. ((Vested Balance + Current Outstanding Loan Balance)/2) - Current Loan Balance

Are there any associated fees?

There is a one-time $175 fee to process your loan and a $75 annual fee to service your loan. There may be additional charges if you elect FedEx check delivery.

Are loans always approved?

On occasion, a loan request is not approved. Most often, this is because:

  • Your plan does not allow loans

  • Your account lacks a sufficient vested balance

  • You are no longer employed by the employer who sponsors the plan you are trying to take a loan from

  • You already have an outstanding loan, and your plan does not permit you to take another one

  • Your spouse doesn't consent (if applicable)

  • Your plan is in a blackout period

  • The information you provided on your loan request doesn't match our records

  • We were unable to verify your bank account

Why do savers take loans from their retirement plans?

Unless your plan has restrictions, you can typically borrow from your 401(k) plan for several reasons permitted by the IRS, such as to pay for a primary residence, medical expenses, or tuition. And unlike taking a traditional loan from a bank, borrowing from your 401(k) plan won't affect your credit score since it doesn't require a credit check.

Taking a loan is generally not a taxable event unless you fail to repay it. Also, because you are borrowing the money from your own account, the interest charged on the outstanding loan balance is paid back to your own account, not to Vestwell or any third-party lender.

What are some implications of taking a loan from my 401(k)?

While the effort of taking out a loan might sound small, the downstream financial implications can be quite significant. These are just a few potential consequences:

  1. While a 401(k) plan is funded with pre-tax earnings, loan repayments must be made from post-tax earnings. Since you'll be taxed again on withdrawals throughout retirement, all interest payments on loan repayments will be double-taxed.

  2. Repayment rules can be quite restrictive. If you fail to repay the loan on the specified payment schedule, the outstanding balance will be treated as a withdrawal. As a result, it may be subject to state and federal income tax as well as a 10% penalty for withdrawing retirement funds prior to reaching age 59.5.

  3. In most cases, if you lose or leave your job, you will be required to pay back the loan in full prior to your next tax return filing date. If you fail to do so, the outstanding balance will be treated as a distribution, which means you will likely owe taxes on the amount, plus a 10% penalty if you are age 59.5 or younger. Similarly, if your plan terminates, you must repay the entire outstanding balance immediately, or you may also face tax consequences.

  4. You could miss out on any potential gains while your borrowed money is out of the market.

Should I take a loan from my retirement plan?

Vestwell does not provide legal, financial, tax, or investment advice to any individual.  All information that we provide on our website, in our Help Center, or through the use of our tools is for general education purposes only. We suggest you consult with a finance professional before making any decisions regarding your 401(k) plan.  We cannot and will not determine whether a loan from your 401(k) plan or any other kind of investment is appropriate for you.