A 401k plan is a retirement savings plan sponsored by an employer that allows employees to save a portion of their income before taxes are taken out. While contributions to a 401k plan are meant for retirement, the IRS allows certain provisions for borrowing or withdrawing funds under certain circumstances.
The loan provisions of a 401k plan allow an employee to borrow a portion of their vested account balance, up to a maximum of $50,000 or 50% of their vested account balance, whichever is less. The loan must be repaid with interest, typically within five years, although longer repayment periods may be allowed for loans used to purchase a primary residence. The interest rate for the loan is usually tied to the prime rate and may be slightly higher than the current prime rate.
It's important to note that not all 401k plans allow for loans, and even those that do may have specific rules and limitations, so it's important to check with your plan administrator for details.
In addition to loans, a 401k plan may also allow for hardship withdrawals, which are withdrawals made from the plan due to an immediate and heavy financial need, such as medical expenses, funeral costs, or the purchase of a primary residence. Hardship withdrawals may be subject to income taxes and a 10% penalty if the employee is under age 59½.
It's important to remember that while loans and hardship withdrawals may provide a source of short-term financial relief, they can have a significant impact on an employee's retirement savings, as they reduce the amount of money that can continue to grow tax-deferred in the account. Therefore, it's generally recommended that these options be used only as a last resort after all other options have been exhausted.