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What is a 401(k) loan and do I qualify?
Updated over a week ago

A 401(k) loan allows you to borrow against your vested 401(k) balance and pay back the amount plus interest to your account over a specified period.

While we understand you may find yourself in a situation where you need to take money out of your 401(k), we encourage you to investigate other alternatives to avoid cutting into your retirement savings. There are some limitations on taking 401(k) loans so you’ll want to confirm you are eligible before moving forward.

However, if you believe a 401(k) loan is the right choice for you, here’s how they work and how to determine if you’re eligible. Additionally, you can find your plan’s full Loan Terms and Conditions here.

How a 401(k) loan works

When you take out a loan from your 401(k), you’ll get terms similar to other loans. These terms will state the amount you are borrowing, the interest rate, and the repayment timeline. However, instead of paying the money back to a bank or lender, you’re repaying it back to your own retirement account.

Unlike other retirement account withdrawals, you don’t have to pay taxes or penalties as long as you repay the loan according to the repayment terms.

Eligibility requirements

While no credit check is required to be approved for a 401(k) loan, there are certain eligibility requirements that must be met.

  • You must be employed with the company sponsoring your Guideline plan

  • You cannot have any other outstanding loans with Guideline

    • If you have an outstanding loan and would like to pay it off before requesting a new one, you can do so within the Loans page of your participant dashboard.

Loan minimums and limits

With a 401(k) loan, there are specific limits to how little or how much you can borrow.

The minimum amount is $1,000. The maximum amount depends on your account balance and whether you’ve had another loan in the past 12 months.

The formula for determining the maximum is the lesser of:

  • 50% of your vested balance, or

  • $50,000, minus the highest outstanding loan balance in the past 12 months

Because this formula can be a little confusing, let's look at some examples.

Example 1:
Graham has a vested account balance of $75,000 and has never taken a loan from his 401(k) plan.

The maximum amount he can take is the lesser of:

  • 50% of $75,000 = $37,500

  • $50,000 - 0 = $50,000

The maximum loan Graham can take is $37,500.

Example 2:
Yasmin has a vested account balance of $250,000 and repaid her prior loan from her 401(k) plan 2 years ago.

The maximum amount she can take is the lesser of:

  • 50% of $250,000 = $125,000

  • $50,000 - 0 = $50,000

The maximum loan Yasmin can take is $50,000.

Example 3:
Ryan has a vested account balance of $250,000. Four months ago, he repaid his outstanding 401(k) loan with a payment of $25,000. Now, he wants to take out another loan.

The maximum amount he receive is the lesser of:

  • 50% of $250,000 = $125,000

  • $50,000 - $25,000 = $25,000

The maximum loan Ryan can take is $25,000.

Repayment terms

If your loan is approved, you will have to pay back the borrowed balance with interest, which is 1 percentage point above the current prime rate. Please note that all interest goes directly back into your account for your benefit.

Loans must be paid back within 5 years, or 10 years if it’s for the purchase of a primary residence.

For loan terms beyond 5 years, you’ll need to submit one of the following documents to Guideline along with the loan request:

  • A copy of your home purchase agreement signed by you and the seller, including the closing date and balance of the purchase price, or

  • A mortgage contract signed by you and the seller​

What to consider before taking out a 401(k) loan

Before taking a loan from your retirement savings, there are several risks your should understand:

  • If you don’t repay the loan, including interest, according to the loan terms the loan will be a deemed distribution. Any unpaid amounts then become taxable (and may be subject to a 10% early distribution penalty).

  • If you leave your current job, you will be required to repay any outstanding loan balance in full within 90 days, or your loan will become a taxable distribution (and may be subject to a 10% early distribution penalty).

  • You might lose out on compounding market returns to grow your retirement savings.

How to request a 401(k) loan with Guideline

If you decide to move forward with a loan, you can apply directly within your Guideline dashboard.

To start the process, click on the Transfers option in the main menu, and select Loans in the dropdown menu. Please note, due to eligibility requirements, the Loans page will only be accessible if you are within a standard 401(k) plan, do not have a current outstanding loan, and are still employed with the company sponsoring your plan.

After reading the notices, click on the “Apply for a loan” button. You’ll then need to read and agree to the terms, confirm your information, and complete the loan application.

Within the Loans page, you’ll then be able to review the status of your loan request. If your loan is declined, you’ll receive a notification as well as an updated status on the Loans page that will outline the reason for non-approval. If your loan is approved, you will receive a notification when your promissory note and amortization schedule become available for you to sign and when your funds are on their way.​

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