In times of economic hardship or an unplanned financial crisis, there might be times when you want to take out a loan that is tied to your 401(k) account.
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The following guidelines apply:
You may take a loan of up to the lesser of $50,000 or 50% of your vested account balance (reduced by the amount of the highest outstanding loan balance, if any, during the previous 12 months). The minimum amount of a loan is $1,000. A maximum of two loans may be outstanding at a time. This plan provides a maximum loan term of 60 months. However, if the loan proceeds will be used to purchase a primary residence, the loan term may be from 61 to 300 months. A loan initiation fee of $55.00 will be charged against your account for each loan requested. Loan repayments will automatically be made by payroll deduction and may not be suspended. If you leave employment and want to continue loan repayments, you may arrange ACH direct debits from a savings or checking account.
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To apply for or to see if you are eligible for a 401(k) loan, log in to your account at
mylife.jhrps.com. From the Menu, click on Model a New Loan. The amount of loan for which you are eligible will appear on the Web page, along with the applicable interest rate. You will need to complete two of the following three items to calculate your loan:
- Loan amount
- Loan duration
- Repayment amount
To check the status of a current loan, log in to your account at
mylife.jhrps.com, click on Review a Current Loan.
Disadvantages of 401(k) Loans
When you re-pay a 401(k) loan, it’s with after-tax dollars.
Unlike the money you contribute to your 401(k), the money you use to pay back your 401(k) loan comes from your after-tax income. Then it will be taxed again when you retire and start 401(k) withdrawals.
If you leave employment at Farm Credit, you have to pay the 401(k) loan back.
You must pay the loan back in full or arrange ACH direct debits with John Hancock from a savings/checking account. If you don’t repay in full or make periodic repayments, the outstanding loan balance becomes taxable as ordinary income…plus a 10 percent excise tax if you are under age 59 ½.
You can’t deduct the interest on your taxes. Unlike the interest on a mortgage or a home equity loan, the interest you pay on a 401(k) loan is not tax deductible.
You could lose investment earnings.
If you borrow from your 401(k) you’ll be slowing the growth of your retirement fund, because the money you borrow won’t be earning invested during that time. It might not seem like a big loss now, but you’ll feel the pain when it’s time to retire.
Borrowing from your 401(k) can be habit forming.
Many financial experts advise people to think of their retirement account as sacred, something not to be touched except in cases of extreme need. If you borrow from your 401(k) once, you might be tempted to do it again.
