What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


How to Borrow From Your 401(k) When You No Longer Work With an Employer

Original post by Linda Ray of Demand Media

Roll your money over to your new employer to get a loan from your 401(k).

A 401(k) is a retirement vehicle set up through your employer aimed at helping you save for retirement. Many companies match a percentage of the money you invest as a perk or company benefit. You won't be alone if you leave your 401(k) with your employer after you leave a job, according to the Financial Planning Association. About 1/3 of employees leave their accounts in place when they leave a job. There are advantages and disadvantages to leaving it there. However, you cannot borrow from the account when you no longer work for the employer.

Step 1

Leave your money in the account and find out about the benefits you'll be getting from your new employer. You'll want to be ready to move the entire amount into a new 401(k) so that you can make arrangements for a loan. Ask the benefits officer at your new job if there is a waiting period for loans.

Step 2

Roll your 401(k) over to your new employer as soon as you are eligible to set up a new 401(k) plan. You then can arrange a loan from your new employer's retirement plan.

Step 3

Close your account when you leave your job and pay the 10-percent early-withdrawal penalty if you're not yet 55 years old. While it may hurt to take the hit, if you really need the money, it is an option open to you.

Step 4

Choose another investment vehicle to roll your 401(k) into and keep out the amount of money you need to borrow. You'll only pay a penalty on the amount you do not put into another qualified individual retirement account (IRA) or annuity.

Step 5

Apply for a hardship distribution if you qualify. You can withdraw the amount of money you invested, although you may not be eligible to receive any earnings that may have accrued on the account. A hardship can include a notice of back taxes owed, extraordinary medical expenses for you or a family member, buying or repairing a house, college tuition or funeral expenses.

                   

Tips & Warnings

  • Expect to pay a 10-percent penalty charge on any outstanding balances you have on a loan you haven't repaid if you lose your job. You have 60 days to repay the loan before being hit with the early-withdrawal penalty. Your job loss can be voluntary or involuntary; it doesn't matter.

Things Needed

  • New 401(k)
  • Hardship application

References

About the Author

Linda Ray is an award-winning journalist with more than 20 years of research and reporting experience. She has covered health care and fitness for newspapers and magazines, including the "Greenville News," "Success," "Verve" and "American City Business Journals." Ray has also reported on hospitals, commercial development and society. She holds a bachelor's degree in journalism.

Photo Credits

  • Photos.com/PhotoObjects.net/Getty Images

Advertisement