401k Loan Calculator

A plan does not have to offer loans, and if it does it can set a lower limit. The most the tax code allows without the loan being taxed is the lesser of two amounts, and it covers the new loan and everything you already owe the plan together:

• $50,000, reduced by the amount by which your highest loan balance in the 12 months ending the day before the new loan is above your loan balance on the day of the new loan; or
• half your vested balance, or $10,000 if that is more. The IRS says plans are not required to include the $10,000 exception, and a loan above half your balance needs security other than your account.

The 12-month rule stops you from repaying a loan and borrowing a full $50,000 again straight away. In the IRS example, Participant A has a vested balance of $100,000 and borrowed $40,000; a year later, owing $33,322, the $50,000 is cut by $6,678 to $43,322, so the new loan can be at most $10,000. All plans of the same employer and its related employers count as one plan for these limits.

The loan agreement has to require repayment within 5 years, in substantially level payments that include principal and interest, made at least quarterly. The 5-year limit does not apply to a loan used to buy a home that within a reasonable time will be your principal residence; the law sets no other term for it, so the plan does. Loan repayments are not plan contributions.

A plan can suspend payments for up to a year during an unpaid leave of absence, or one where your pay is too low to cover them, but the loan still has to be paid off within 5 years of the loan date, so you make up the missed payments with larger payments or a lump sum at the end. It can also suspend payments while you serve in the uniformed services and extend the term by that time.

Your plan does. Under Department of Labor rules the plan's written loan program has to set out how it determines a reasonable rate of interest, and a rate is reasonable if it gives the plan a return in line with what businesses that lend money charge for similar loans. The IRS lists interest rate information among the details a plan may give you when you apply for a loan. Enter the rate from your plan's loan policy.

A loan that breaks the rules becomes a deemed distribution. If the amount is over the limit, only the excess is deemed distributed when the loan is made: a $70,000 loan against a $200,000 balance gives a $20,000 deemed distribution. If the terms break the 5-year or quarterly payment rule, the whole loan is deemed distributed. If you stop paying, the whole balance still owed, including accrued interest, is deemed distributed.

A plan can allow a cure period, which cannot run past the last day of the calendar quarter after the quarter the missed payment was due. In the regulation's example, a $20,000 loan repaid monthly has its first missed payment on August 31, 2003; with a three-month cure period the deemed distribution is the $17,157 owed on November 30, and with a cure period to the end of the next quarter it is the $17,282 owed on December 31. The calculator reproduces both.

A deemed distribution is taxed like a withdrawal: the part not taxed before is income, and it may owe the 10% additional tax if you are under 59½. It cannot be rolled over, it does not end the loan, and repayments you make afterwards become tax basis in the plan. It still counts as outstanding when the plan works out how much more you can borrow.

A plan can require you to repay the whole balance when you leave or when the plan ends. If you do not, the plan can reduce your account by what you owe. This plan loan offset is an actual distribution, not a deemed one, so it is treated as a distribution and can be rolled over.

If the offset happens because the plan ended, or because you did not repay after leaving the employer and it happens within 12 months after you leave, and the loan met the loan rules just before, it is a qualified plan loan offset: you have until your tax return due date, including extensions, for the year of the offset to roll the same amount into an IRA or another plan, which avoids the immediate income tax on it. Any other offset has the usual 60-day rollover period.

For a qualified individual, someone whose main home was in the area of a major disaster declared by the President during the incident period and who had an economic loss from the disaster, a loan made during the applicable period can be up to $100,000 and up to the whole vested balance instead of half (IRC 72(p)(6)). Repayments due in the period from the start of the incident to 180 days after it ends can be delayed for a year, if the plan allows these rules. The calculator uses the regular limits.

The comparison is an illustration, not a forecast. It starts both cases from your vested balance and grows the invested money at your assumed return, adding your yearly contributions. With the loan, the amount borrowed leaves the investments on day one, and each payment, principal and interest together, goes back into your account as you repay. So the loan costs you the gap between the assumed return and the loan's rate while it is out, and more if you stop contributing while you repay; if the rate is higher than the return, the loan comes out ahead in the account. It leaves out taxes, fees and the risk of default. For your 401(k) as a whole, use the 401k calculator.