Is It Smart To Take A Loan From Your 401K? 
A 401k is a designed as a retirement vehicle and it is not a good idea to take loans from it unless you absolutely have to . Most 401k plans do allow loans but there may be strict guidelines on making and administering them with some employers . The statutes place no specific restriction on the need or use of the loan , except that they have to be reasonably available to all 401k plan participants . However , the employer can restrict reasons for the loans . It is somewhat common for a plan to restrict the loan for educational expenses for a family member , pay un-reimbursed medical expenses or help purchase your first home . There are restrictions on how much of the 401k balance can be borrowed as well . The IRS says an employee can borrow $ 50,000 or 50 % of the vested account balance . If you are under age 59 1/2 and you leave your employer and the loan has not been repaid , the loan will be re-classified as income for that year and you would be taxed at ordinary income tax rates . In addition , there would be a 10 % early withdrawal penalty . When you borrow money from your 401k , you interrupt the concept of compounding your money and that can end up costing you a larger portion of your retirement account than you imagined . It is always best to pay back the 401k loan as quickly as possible to minimize the long-term effect on your retirement funds . 