7. Borrowing Too Much From Your 401k
Some employers let employees borrow money from their 401k plans. If allowed, the maximum loan amount is the smaller of $50,000 or half of your vested account balance. For example, if your balance is $60,000, you can borrow up to $30,000. If your balance is $200,000, you can only borrow up to $50,000. Typically, you have up to five years to repay the loan.
If you leave your job, including if you are let go through no fault of your own, the remaining balance is treated as an immediate distribution, subject to income taxes and early withdrawal penalties. The IRS imposes a 10 percent early withdrawal penalty on top of the income taxes due. So if you have a $10,000 balance on your loan that you can't pay back and you fall in the 25 percent tax bracket, you'll owe the IRS $3,500 in taxes and penalties.
That's not to say that 401k loans are never helpful. When you repay the loan, the interest gets added back to your 401k plan, so you're essentially paying yourself instead of a bank. As good as that sounds, you're missing out on the market returns on the money that you've borrowed because it's not invested.
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