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I got a loan from my 401k that I repaid a while back and I don't remember anything about a $50k limit. Now I am buying a new house before I sell mine and the $50k limit seems to be ridiculous since it is my money and I just need it for 1-2 months. (50k is a very small % of my total)

So when did this limit get put in place and is there a way around it?

Also please do not lecture about taking money from 401k. This money is just needed as a bridge and will be much cheaper than a bridge loan + different standard loan. The money will be paid back in full for sure when current house is sold - which could be almost the same time.

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    Congress has several times enacted legislation to expand the maximum loan amount for victims of certain natural disasters (Katrina, Rita, Wilma) or other widespread phenomena (CARES). What year did you obtain the previous 401(k) loan, and where were you living? – shoover Nov 24 '20 at 13:49
  • It might temporarily be $100K right now? – TTT Nov 24 '20 at 19:14
  • Why not take 100% of you 401k. As long as you put the money back in < 60 days there is no penalty. Call you 401k administrator to confirm. – Julius Seizure Nov 25 '20 at 18:24
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When did this limit get put in place?

The Internet is really good for finding current information, but it takes a bit of sleuthing to find historical information. I haven't found anything to indicate whether the loan limit has been a part of the 401(k) system since its inception in 1978, but I can't find anything that documents a lower limit, as would likely be the case if it started out lower and has been gradually increased.

I have found two articles that indicate that the limit was $50,000 as far back as 2014.

From https://www.marketwatch.com/story/avoid-the-temptation-of-dipping-into-your-401k-2015-06-04 (Published: June 29, 2015):

The Internal Revenue Service generally limits a participant’s plan loans to a total of $50,000 or half of the participant’s vested balance, whichever is smaller.

From https://pensionresearchcouncil.wharton.upenn.edu/wp-content/uploads/2015/09/WP2014-01-Lu-OSM-Utkus-Young-2.12.20144.pdf (February 2014):

...the participant may only borrow up to half of his account balance with a maximum loan of $50,000

That Lu/Mitchell/Utkus/Young paper refers to a number of earlier papers, some of which might have data on the limits in place before 2014.

Aha! From a 1997 report from the US General Accounting Office:

Borrowing from 401(k) pension plans is legally permissible and allows plan participants to borrow the lesser of $50,000 or one half of their vested account balance.

Trying to follow references from the GAO report even farther back is getting challenging. So we can say that it has been in place since at least 1997.

Kazoni points out in a comment that the $50,000 loan limit is found under IRC 72(p) which was added with Section 236 of the Tax Equity and Fiscal Responsibility Act of 1982. So now we can say since at least 1982.

Is there a way around it?

The CARES Act (aka Coronavirus relief/stimulus) increased the limit to $100,000 in certain cases. From https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers:

The CARES Act also permits employers to increase the maximum loan amount available to qualified individuals. For plan loans made to a qualified individual from March 27, 2020, to September 22, 2020, the limit may be increased up to the lesser of: (1) $100,000 (minus outstanding plan loans of the individual), or (2) the individual's vested benefit under the plan.

Note that this expansion ended on 22 September 2020, and the IRS page hasn't been updated to indicate an extension. And that assumes you qualify, which is probably a whole question unto itself. (The list of qualifications is unclear as to which criteria are "And" and which are "Or".)

Additionally, employers and/or plan providers can implement stricter limits than the $50,000 loan limit.

For ways around the limit that don't involve a loan from your 401(k), Pete B.'s answer gives some good alternatives.

So let's answer this part with: other than a potential increase under CARES, there are no ways around it within the 401(k) system.

As for the "seems to be ridiculous since it is my money" part, keep in mind that the whole point of the program was to encourage saving money for retirement by creating tax advantages. Yes, it is your money, but it is entirely reasonable to have limitations on what you can do with the money in exchange for the tax advantages.

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  • The $50,000 loan limits is found under IRC 72(p) which was added with Section 236 of the Tax Equity and Fiscal Responsibility Act of 1982 (starts at bottom of page 186 of the pdf). – kazoni May 12 at 18:50
  • @kazoni That's a fantastic find! I've incorporated it into the answer. Thank you. – Doug Deden May 18 at 22:21
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This is a problem that people currently face when trading houses. Typically, one does not have the amount of a home purchase laying around even if their net worth far exceeds their purchase price. Getting a conventional mortgage cost real money, and some borrowers may not qualify for a second mortgage. For this reason most home traders make the new home purchase contingent upon selling their existing home.

The IRS states that you are limited to borrowing 50K from your 401K, so there is no way around that provision. Additionally your 401K plan administrator may provide additional restrictions, and there is no way around those except by leaving your job. As shoover mentioned in the comments, you can go up to 100K if you are the victim of certain natural disasters.

So what options do you have?

Margin Loan - If you are fortunate enough to have a large taxable investment account, you can obtain a margin loan on your assets. Using the right broker this can be a much preferred way to finance a home with lower rates then a conventional mortgage and few if no fees.

HEL - If you enjoy a large amount of equity in you existing home, you could obtain a home equity loan or line of credit. These typically have low rates and low closing costs. If your home is paid off, you can put this loan in first position to obtain a very low rate.

I really like the HEL option as picture this scenario. You want to buy a 500K house and your current house will sell for about 300K. Lets say the bank will give you 250K at 1.9% at no closing costs for a loan on your existing home. Then you come up with ~250K in cash. You keep the old house for a couple of months then sell it. As part of the close it pays off the HEL. You are out less than $1,000 in interest.

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    1.9%? Where? I'll take it. – AxiomaticNexus Nov 24 '20 at 18:58
  • @AxiomaticNexus go to an bank with low home equity loan rates. Ask for a fixed rate home equity loan in first position (so it will replace your current mortgage), ask for a short term to keep the rate low. When I did this I got 1.9% for 7 years when the prevailing 30 year rate was around 4.5% – Pete B. Nov 25 '20 at 11:20
  • This is kind of missing the point. The issue isn't mortgage rates or the fact that I can take out another loan. I fully understand this and rates would have no bearing as the loan would be 30-180 days at most. The point is not paying loan fees. I am downvoting this because it really distracts from my question into the realm of general advice which was not the question. – blankip Nov 30 '20 at 19:18
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If you need the money for a month or two, then take out 100% of your 401k. There is no penalty if you return the money in less than 60 days. Note this is an IRS rule but some employers will add extra company-specific restrictions to their 401k. I used the 60 day rule to drain my IRA accounts to buy a house. I put the money back in < 60 days and there was no penalty.

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  • You will find personal finance forums are not interested in objective decision making, gravitating towards risk averse solutions that work for a broad population who cannot trust themselves. – CQM Nov 25 '20 at 19:13
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    Can you do a 100% withdrawal while still employed? – mhoran_psprep Nov 25 '20 at 19:20
  • Isn't there a rule saying that you can only do this once in any 365-day period? Just saying "you can do this" without mentioning that limitation seems very dangerous. – Tanner Swett Nov 29 '20 at 7:29
  • @Julius Seizure - Can you provide a source for your answer? Are there any limitations that the OP should be aware of? – Doug Deden Nov 30 '20 at 19:39
  • I called my 403(b) after seeing this question posted. I also plan to buy a house and want to use funds from my work retirement account. I actually did this in 2013 when I purchased my first house, however I pulled funds from my IRA accounts and redeposited the funds in < 60 days. My current 403b is managed by Fidelity. The customer rep was aware of the 60 day rule and immediately asked if I was planning to purchase real estate. She informed me my employer will not allow redeposit of funds for the $225k I wanted, but I could withdraw $100k under the CARES Act and repay over 3 yrs (or less) – Julius Seizure Dec 1 '20 at 20:14

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