If I Have a 401(k) Loan, Can I Get Another Loan Prior to Repayment?

If you're pressed for cash, your 401(k) plan can provide a loan in your time of need. If you've already taken out a loan, you may be able to take out an additional loan even though you haven't finished repaying the first one. Just make sure you can keep up with the required payments on both.

Before you can figure out how much more you can borrow, you have to figure out the total allowable amount of loans. The maximum amount that the Internal Revenue Service allows you borrow is the smaller of $50,000 or half your vested account balance. Your vested balance is the amount you would keep if you left your job. For example, if your vested balance is $78,000, the maximum total loan amount would be $39,000.

To calculate the maximum amount of the second 401(k) loan, you'll do the following:

1. Calculate the difference between the highest outstanding balance of your 401(k) loan during the previous 12 months, and your 401(k) loan balance on the date you want to take the new loan.
2. Subtract the result from the maximum loan amount available with your 401(k).
3. Subtract your 401(k) loan balance on the date you want to take the new loan from the result to find your maximum new loan amount.

For example, assume your maximum loan amount is $50,000, the highest outstanding balance of your 401(k) loan during the previous 12 months was $35,000, and your 401(k) loan balance on the date you want to take out the second loan is $29,000. First, the difference between $35,000 and $29,000 is $6,000. Next, $50,000 minus $6,000 is $44,000. Finally, $44,000 minus $29,000 is $15,000, which is the maximum amount you could get for an additional loan.

Before you run to take out a second 401(k) loan, check with your 401(k) plan administrator. Just because the IRS lets you take out more doesn't mean your plan will. A plan might limit the number of loans you have outstanding at any time.

For example, your plan might only allow you to have one loan at a time. Alternatively, your plan might set a lower maximum loan amount than permitted by the IRS. For example, you might only be allowed to borrow up to $40,000, even if the IRS would allow a larger loan. Since these vary from plan to plan, you have to talk to your plan administrator to find out what extra rules your plan imposes.

Any time you think about taking out a 401(k) plan loan, potential repayment issues loom. If you lose your job, even if you can prove it's not your fault, your employer may require you to pay the entire balance. If you can't pay it back, your employer can report the unpaid balance to the IRS as a taxable distribution.

In addition, if you're under age 59 1/2 and fall behind on your loan payments, the unpaid balance is subject to an extra 10-percent penalty. Another factor to consider is that your 401(k) plan may require your spouse's consent before you can take out a loan.