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Chapter 17. Borrowing from Yourself > How Much Can You Borrow? - Pg. 169

Borrowing from Yourself 169 If your plan does allow loans, ask for a copy of the plan's loan program. It may not have been in the stuff the company gave you when you signed up for the 401(k). Read the small print, because in legal documents the big print giveth and the small print taketh it away. This document may be full of legal mumbo jumbo, but that stuff is usually there to protect the plan sponsor and keep lawyers off the unemployment line. Read it through even if you have to read it several times to make sense of it. You may be borrowing money from yourself, but you're entering into a legal and binding agree- ment with the plan trustee. The big guys in Washington want you to be saving your money for retirement just in case there is not enough Social Security to go around for everyone (see Chapter 23, "Social Security and Med- icare"). They don't want you using the funds to pay for frivolous stuff like vacations or Christmas gifts, so they have offered a set of guidelines for employers to use when allowing loans to employees. Many plans require that your loan be used only for one of the following reasons: · · · · To pay education expenses (for yourself, spouse, or child) To prevent eviction from your home To pay unreimbursed medical expenses To buy a first-time residence For What It's Worth Many small companies just can't afford to add a loan feature to their 401(k) plan because of the high cost of administering it. Small companies often pass on many of the costs associated with running the 401(k) plan to the participants. These are just guidelines, but many plans do adopt them, because it's easier than trying to set their own guidelines and trying to please everyone. Plans can add to this list and include such items as purchasing a car or a second home. When your employer sets up a 401(k) plan, they have lots of rules and guidelines to work with and they can be as limiting as they like, as long they do not discriminate against any one employee or class of employees. So what goes for the boss goes for the rank and file here; she can't get a loan to take that Hawaiian vacation, either. How Much Can You Borrow? Now that you found out your plan allows you to borrow, the next question is how much can you borrow? It depends! How much do you have? The rules here are easy. The guys in Washington say up to $50,000 or one half of the value in your account, whichever is smaller. And many companies add a minimum amount you must take out of at least $1,000 as well (because of the paperwork). What does one half the value in your account really mean? It means you can usually only borrow the money that you put in and any of your employer's contributions that you're now vested in. Again, those are the Department of Labor's rules. Now, if your employer wants to tighten up on these rules he can, but most do not.