401k Loans

I have funds in an employer's 401k retirement account. I want to be able to take a loan against the 401k to purchase a house, but I don't want to be liable for the balance if my employment with the company ends. Can I roll the 401k into a rollover IRA and still do the loan?

Answer

Loans from 401k plans are governed by plan-specific rules. Not all 401k plans have the same rules. You have to check with your plan sponsor to determine the rules and limitations for your employer's 401k plan. In general, loans from 401k plans, for first time home purchase or otherwise, are immediately callable once you leave your employer otherwise it's considered a withdrawal and a 10% penalty applies if you are under 59 1/2 as well as the income tax on the amount. Furthermore, you can not rollover your 401k into an IRA while you are still employed by the same employer. Once you leave your employer and rollover your 401k into an IRA you can withdraw up to $10,000 from your rollover IRA for first time home purchases without having to pay a 10% penalty if you are under 59 1/2 (income tax is still due however). If married, your spouse can also withdraw the same amount from her IRA as well.

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