401(K) plans are retirement saving plans provided by employers, and you can also borrow against these plans. 401(K) loans seem very appealing if you need funds to meet an emergency requirement, and the interest you pay on the loan also ends up in your own account, contributing toward your retirement plan. However, you must understand all the basics of 401(K) loans before you sign on the dotted line.

Advantages
Investing in 401(K) ensures that your money is safe and you can use it when you retire and do not have an active source of income. When you need to take a loan, options like personal loans, credit card cash, and high-interest bank loans may not seem worthy as you have to pay interest. On the other hand, taking a 401(K) loan has the following advantages:

• There is no credit check
• Easy loan application
• Easy access to the funds
• Interest is paid into your own 401(K) account

Drawbacks
Besides the positives, the following are some downsides of 401(K) that you need to be aware of:

• If you ever declare bankruptcy, your retirement asset is safe, and this includes traditional IRA, 401(K), 403(b), Simple IRA, and Roth IRA. However, the basic concept of 401(K) loans is that the money you borrow from the plan becomes open to creditors.
• In case you lose your job, the 401(K) loan balance has to be paid within 60 days. If it is not repaid, the state and IRA consider it a withdrawal and state and federal taxes and penalties are levied if you are below 59.5 years. If you are unemployed at the moment, you may face a massive tax bill.

Not all 401(K) plans allow loans
Many employers are opposed to the idea of an employee taking a loan from the 401(K) plan. They believe that retirement funds are an asset that should not be used for any other purpose, and many allow people to take 401(K) loans only for paying medical expenses or buying a home.
The investment in this plan is tax-deferred, but the IRS charges a 10% penalty tax on withdrawals. Also, companies do not allow loans as they want to prevent people from mortgaging their assets.

Maximum amount
Another 401(K) loan basic to understand is that you can only withdraw equal to or less than 50% or $50,000, regardless of the amount you hold in your 401(K) account.

Interest
While repaying a 401(K) loan, you need to pay an interest of around 1 to 2 percent, and this is added to your 401(K) account. Repayment may require anything from 1 to 5 years, and it is extended for those buying a house.

401(K) is a great way to save for your retirement and build your wealth. Borrowing from this asset will cost you more even if you repay it, so you must review the basics of 401(K) loans as well as their pros and cons before making a decision.