Can I Borrow All of My 401(a)?

If you work for the government, it is possible you are invested in a 401(a) plan. A 401(a) plan is similar to a 401(k) plan offered by many companies, but it is primarily restricted to federal and state government employees or Indian tribal governments. While intended for long-term retirement investing, you can borrow against the value of your 401(a) account if you have an immediate need for the money.

The law allows for 401(a) loans, but the final arbiter is your employer. If your particular employer chooses to not allow 401(a) loans, you cannot take one. In the event loans are allowed in your plan, there are legal limitations to the size of the loan.

You cannot borrow more than half the value of your 401(a) account or $50,000, whichever is less. Legally, you can also borrow up to $10,000 as long as that amount doesn't exceed your total account value. However, many employers stick to the 50 percent or $50,000 rule.

The good news about borrowing from your 401(a) plan is that you pay interest to yourself. Since you are borrowing from your own plan instead of from a third party, the interest you pay accrues to your account. However, you must comply with IRS rules and any additional requirements of your specific plan.

Under IRS rules, you are required to pay back the entire value of the loan within five years, making substantially equal payments at least quarterly. Many employers require monthly payments and the consent of your spouse as well. Under certain circumstances, you may be able to extend the period of the loan, such as if you borrow money for the purchase of your principal residence. You might also be able to suspend payments temporarily for events such as military service.

Under normal circumstances, you don't pay tax if you borrow money from your 401(a). However, if you fail to make your payments or otherwise violate the terms of your loan, the IRS deems your outstanding loan balance to be a withdrawal. In that instance, you have to pay tax on the amount of the loan, along with a 10 percent penalty if you are under age 59 1/2.

If you borrow money from your 401(a), the amount you borrow is no longer invested in your account, depriving you of the potential growth of your retirement savings. While the money you borrowed from your 401(a) was pretax money, you must replace it with after-tax money, which increases the cost of your borrowing.

If you leave your job with an outstanding loan, your loan balance typically becomes due immediately. If you don't have the money to repay it, your loan amount becomes taxable.