Fidelity 401(k) Loan Rules: What You Need to Know

Fidelity 401(k) loans offer a way to borrow from your retirement savings, but there are specific rules and conditions you must follow. Understanding these rules is crucial to avoid penalties and ensure you use the loan effectively. Here’s an in-depth guide on the key aspects of Fidelity 401(k) loan rules, including eligibility, borrowing limits, repayment terms, and potential impacts on your retirement savings.

Eligibility Requirements
To qualify for a Fidelity 401(k) loan, you must meet certain criteria:

• Active Employment: You must be an active employee of the company sponsoring the plan. If you leave the company, the loan may become due immediately.
• Plan Participation: You must have an active 401(k) account with sufficient balance. Loans cannot be taken from employer contributions or any vested amounts.
• Loan Limits: The maximum amount you can borrow is typically the lesser of $50,000 or 50% of your vested account balance. However, if your account balance is less than $20,000, you can borrow up to $10,000.

Loan Application Process
Applying for a loan from your Fidelity 401(k) involves the following steps:

1. Review Plan Documents: Understand the specific terms and conditions of your plan. These documents outline the rules, including any additional restrictions.
2. Complete Loan Request: You will need to fill out a loan request form. This can usually be done online through Fidelity’s website.
3. Loan Approval: Fidelity will review your application and determine if you meet the eligibility criteria. If approved, you will receive the loan amount as a lump sum.

Repayment Terms
Repayment of the loan must be made through payroll deductions. Key terms include:

• Repayment Period: Loans must generally be repaid within five years. If the loan is used to purchase a primary residence, the repayment term may be extended.
• Interest Rates: The interest rate on the loan is typically set at a rate comparable to the prime rate plus 1%. The interest paid goes back into your 401(k) account.
• Payment Frequency: Payments are usually made on a bi-weekly or monthly basis, depending on your payroll schedule.

Impact on Retirement Savings
Taking a loan from your 401(k) can have several implications for your retirement savings:

• Reduced Growth Potential: The amount borrowed will not be earning investment returns while it is out of your account, potentially impacting the growth of your retirement savings.
• Repayment Challenges: If you fail to repay the loan according to the terms, it may be considered a distribution, subject to taxes and penalties.
• Loan Default: If you leave your job or are terminated, the outstanding loan balance typically becomes due immediately. If not repaid, it may be treated as a taxable distribution.

Advantages and Disadvantages
Advantages:

• Access to Funds: Provides a way to access cash without having to sell investments or incur high-interest debt.
• Flexible Repayment: Payments are made through payroll deductions, which can be convenient.

Disadvantages:

• Potential Penalties: Failure to repay the loan or leaving your job can result in penalties and taxes.
• Investment Impact: Reduces the amount of money in your 401(k) that could be growing for retirement.

Common Questions

1. Can I take multiple loans from my 401(k)?
   Generally, you can have more than one loan, but the total amount cannot exceed the borrowing limits.

2. What happens if I default on the loan?
   If you default, the remaining balance may be considered a taxable distribution, and you may incur additional penalties.

3. Can I pay off the loan early?
   Yes, you can pay off the loan early without any prepayment penalties.

Conclusion
Understanding the rules and implications of taking a loan from your Fidelity 401(k) is essential for managing your retirement savings effectively. By carefully considering the eligibility requirements, application process, and repayment terms, you can make an informed decision and avoid potential pitfalls.