Most 401k plans allow you to borrow against the value of your 401k. 401k loans are supposed to be used as a last resort only. They can provide you with capital for an emergency situation.
Set up the Loan
Find out who your 401k administrator is. Your human resources department should be able to help you with this. Ask your administrator about the rules of 401k loans at your company. Your company may or may not even allow loans against your retirement savings plan.
Rules of Borrowing
Be sure to ask about the rules of disbursement and repayment of the loan. Many companies that allow loans will let you borrow up to 50% of the current value of your account. You are required to pay interest, but that interest goes back into your account. You must liquidate, or sell, some of the mutual funds or other securities in your account to access the cash for the loan.
Usually your plan administrator will mail you a check for the amount of the loan. You will then be set up on a repayment plan. You can use the proceeds from the loan to pay for whatever you like, but you should be very cautious about using this money.
Risks of Borrowing from your 401k
You should be aware that borrowing money from your 401k plan carries several risks. The first to note is that most plans will require you to pay back the loan in full immediately upon termination from the company. If you are planning on leaving your company soon, you should really think twice about borrowing money in this way.
Also, you should be aware that this is not a free loan. Even though you pay interest to yourself, there is an opportunity cost by not being invested. If you pay yourself 5% in interest over a year and the mutual funds you would have invested in gain 10%, you not only grow your account less, but you also have to pay for the growth in your account!
Things You Will NeedInformation from your HR department
Social Security number and other personal information to fill out paperwork
Again, 401k loans are a great source of capital and they should be used very cautiously for emergency situations.
Tips & WarningsBe sure to ask thorough questions when you talk to your 401k administrator. You don't want to wait until after you take out the loan to find out about the terms of the loan.