401k Loans: Are They REALLY Worth It?

June 1, 2023 · Personal Finance

Frequently Asked Questions:

Will my employer know if I take out a 401k loan?

Yes, they’ll likely know about any loan from their sponsored plan. You may even need to go through the human resources department to request a loan like this, and you’d pay it back through payroll deduction, which they’d also know about.

Loans aren’t guaranteed to be approved either. Your plan may not even offer them. If you’re concerned about a manager finding out about your loan request, you can ask the HR department to keep your request confidential.

What if I leave my job?

If you quit your job while you still have an outstanding 401k loan, you must repay the entire loan within 90 days. Failing to do so will have the remaining balance be treated as a distribution, and you’ll owe taxes and a 10 percent early withdrawal penalty.

You can’t replace those withdrawals when you have more money. That means you’ll also lose out on tax-deferred growth for that money offered through your plan.

Can I pay off my 401k loan early?

Yes, loans from a 401k plan can be repaid early without a prepayment penalty. Many programs offer the possibility of repaying loans through regular payroll deductions, which can be raised to pay off your loan much sooner than the requirement.

Remember that those amounts are paid with after-tax dollars, unlike contributions made before taxes.

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