Typically, plan participants can borrow from 401(k) retirement plans by contacting plan administrators and filling out some paperwork, notes Ameriprise Financial. Although 401(k) plans are contractual and can have different terms, they ordinarily allow participants to receive loans without applications requiring approval from a third party or credit checks. Sometimes the borrower pays a small processing fee.
Although most 401(k) plans allow participants to borrow against the account, not all of them do, explains Clearpoint Credit Counseling Solutions. The first step in obtaining a loan involves the participant checking with the plan administrator or plan summary to see whether loans are available and under what conditions.
Typical plans allow participants to borrow up to $50,000 or half of the amount vested, whichever is less, explains Ameriprise Financial. Participants can usually borrow the money for any reason — to pay off debt or put a downpayment on a house, for instance — but the borrower usually must repay the loan within five years. If the participant doesn't pay the loan as required, the Internal Revenue Service treats the loan as a taxable distribution, triggering a 10 percent federal penalty tax for people under age 59.5, as well as regular income tax on the amount.