If a 401(k) plan allows loans, employees can borrow at least $10,000 and a maximum of the lesser of 50 percent of the vested account balance or $50,000 as of 2015, reports the IRS. The account holder must pay back the loan within 5 years unless an exception applies.
Because in 401(k) loans employees are essentially borrowing from themselves, there are no credit checks and low application fees, according to About.com. Although the borrower must pay interest, the interest goes back into the 401(k) account. Borrowers must make loan payments at least quarterly in substantially equal periodic payments, states the IRS. Employees purchasing a principle residence are normally allowed more than five years to pay back the loan. Employees in military service can suspend loan payments.
One difficulty with 401(k) loans is that when an employee leaves the company with the plan, the loan must be repaid immediately, as reported by USA Today. If the loan is not repaid, it becomes a distribution subject to a 10 percent penalty tax. Additionally, because loan repayments come from after tax dollars, account holders pay income tax twice, once when repaying the loan and again when the funds are accessed upon retirement. Borrowers from 401(k) accounts also lose out on potential investment growth until the funds are repaid, points out About.com.