loan amount. You may be charged an administration fee for processing the loan paperwork and managing the account. And, of course, you’ll have to pay interest


on the loan. The interest rate, which is set by the plan administrator, is typically based on the prime rate plus a percentage point or two.


TRICKY TRAIL If you do decide to borrow from your 401(k), some plans require the consent of the participant’s spouse. Also, you have to be a current employee in


order to tap into a 401(k). You aren’t allowed to borrow if the 401(k) is from a previous company, unless you rolled that money into your current plan. Moreover, there’s a limit to how much


you’re allowed to take. The maximum is either 50% of your account balance or $50,000, whichever is less. If you take a smaller amount and then decide to take an


additional 401(k) loan in the future, it can’t add up to more than the maximum amount when combined with the remaining balance on your original loan.


FLIP SIDE OF BORROWING Having outlined the potential pitfalls and negatives, some good reasons exist to tap into a 401(k), too. If you’re borrowing to invest in an asset that is likely to


produce higher returns than you’re getting in your 401(k), or you plan to use the money from the 401(k) loan to pay down a high-interest loan, then it could be beneficial, says Joseph. In addition, all the interest you pay on a 401(k) loan


is deposited back into your account — in other words, you’re essentially paying yourself interest instead of paying a financial institution, points out Chad Gammon, a financial adviser in Hiawatha, Iowa. Of course, there is another way to take money out


of your retirement fund without borrowing: a hardship distribution. Some plans offer these, but they have limitations. Typically, hardship withdrawals are for things like


funeral expenses, tuition payments, and medical bills. If you take a hardship withdrawal, you’re not required to pay it back, but there are still downsides. Depending on the type of retirement account and the


specific circumstances of the withdrawal, you may have to pay income taxes on the withdrawal — specifically, 401(k)s are subject to this rule. Plus, if you’re younger than 59 and a half, you may also


be subject to an early withdrawal penalty of 10%, unless an exception applies.


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