The simplest way to borrow against your 401(k) retirement plan is to take a temporary distribution of funds in the form of a loan. According to the IRS, many 401(k) plans allow participants to borrow tax-free funds from their account as long as the loan is 50 percent of the total balance or $50,000, whichever is less, and the loan is repaid within five years in relatively equal quarterly installments.
Another way to make a tax-free withdrawal is to take a hardship distribution. However, the IRS specifies that this is only allowed if the participant has a heavy and immediate need for funds that could not be satisfied through other means, such as typical loans or liquidation of personal assets. In addition, such distributions typically can only include employee contributions, not employer matching or accrued interest. This type of distribution is generally granted for things such as medical expenses, tuition payments, eviction from a primary residence or funeral costs.
While the IRS allows account holders to take discretionary distributions before age 59 1/2, not only do the funds need to be reported as income on your taxes, an additional 10 percent tax is assessed unless the withdrawal falls into one of the short list of exceptions, such as for the payment of allowable medical expenses or because of an IRS-approved disaster.