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I Need Quick Access to the Money in My 401(k). Should I Take a Loan or a Distribution?

Your decision should be influenced, in part, by the tax implications of the option you choose.


Your decision should be influenced, in part, by the tax implications of the option you choose.

Loans are not considered taxable distributions unless they fail to satisfy plan rules regarding the loan amount, duration, and repayment terms (see details below). But distributions are generally taxable as ordinary income, and workers who receive retirement plan distributions before reaching age 59½ may be required to pay a 10% early withdrawal tax.

However, the 10% early withdrawal tax will not apply in certain situations, such as when the distribution is made:

  • To the participant's beneficiary or estate after the death of the participant.
  • Because of a qualifying disability.
  • To a participant who has "separated from service" (i.e., ceased to be employed by the company sponsoring the plan) during or after the calendar year in which he or she reached age 55.
  • To an alternate payee under the terms of a qualified domestic relations order (QDRO).
  • For medical care (limits apply).
  • To reduce excess contributions.
  • On account of certain disasters for which IRS relief has been granted.

When considering a loan, there are several rules to keep in mind. For example, the IRS generally limits the amount of a loan to 50% of your vested account balance, up to a maximum of $50,000. Most retirement plan loans must be repaid within five years, although loans used to purchase the participant's primary residence may be paid back over a longer period of time. And repayments must be "substantially level" and made at least every three months. A violation of any of those rules may cause the loan to be treated as a taxable distribution. Also keep in mind that not all employers allow plan loans, and some may place restrictions on the reasons, minimum amount, and number of loans.

It's also important to remember that an employer may require participants who have taken a loan to repay the entire amount immediately upon leaving the company, regardless of the original repayment schedule. If an ex-employee fails to do so, the employer is required to report the loan to the IRS as a distribution. In such cases, income taxes and early withdrawal taxes may apply.

Another important factor to consider is the amount of time required for each type of transaction. So ask your employer or plan administrator which option would put the money in your hands sooner. Regardless of the strategy you choose, however, you may be required to wait several weeks before receiving a check.


This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.





 This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

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