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Borrowing for Your Small Business

Retirement Account Loans

Many companies allow employees to borrow from their 401(k) or other qualified retirement plan. But remember...this is a retirement fund first and foremost!! We always recommend that you save for your retirement first... it is the single largest commitment you have to fund. So if you are going to borrow from your or your spouse's 401(k) plan, do it knowing it will get in the way of your retirement plans.

Since your loan is secured by the 401(k) plan, Department Of Labor rules won't let you borrow more than 50% of your vested account balance. There are also certain tax rules that limit the amount you may take as a loan without it being considered a distribution. Under current tax law, a 401(k) plan can permit you to borrow as much as $50,000 or half of your vested benefits in the 401(k) account, whichever is less. If your vested account balance is at least $10,000, you can borrow up to $10,000, even if 50% of your vested account balance is less than $10,000. If your vested 401(k) plan account is less than $10,000, you can borrow up to your vested account balance.

The following chart summarizes these borrowing options:

If your vested account balance is.....

The maximum you could borrow is....


your vested account balance



$20,000 and higher

50% of your vested account balance, not to exceed $50,000

Loan terms are usually no more than five years for general loans. Loans must be paid back on a regular basis—quarterly, monthly, or biweekly, but at least once each quarter.

CAUTION: When you borrow from your 401(k) plan, you no longer earn investment returns on the amount you borrow from the account. In effect, that money is no longer in the 401(k) plan earning've borrowed it, and it is out doing something else. So, although the interest you pay on the loan goes back into your 401(k) account, the true cost of the loan is the amount you would have earned on that money had you not borrowed it from the account. It is what we call opportunity cost, and it is a tricky concept. It is true that "you're paying yourself back," but that's not all that's happening—you're also missing out on the investment earnings on those funds that were borrowed!

On the flipside, borrowing from your 401(k) loan can work to your advantage if the market is losing money. By pulling the money out as a loan, you're not participating in a losing market.

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