Loans From Qualified Retirement Plans

Some individuals suffering financial problems attempt to avoid having to file a Chapter 7 bankruptcy  or a Chapter 13 bankruptcy by withdrawing funds from a qualified retirement plan to pay their debts However, this strategy is seldom a good idea. In the first place qualified plans are designed to provide for a worker’s retirement, and withdrawing the funds to apply to current problems can lead to devastating long term consequences by leaving the workers with little means of support during the final years of their lives.
In addition qualified plans contain tax incentives to encourage people to use these plans and save for their retirement, and the flip side of these incentives is that withdrawing the funds early has a heavy tax cost that can add to a person’s financial problems.

Finally, creditors cannot levy against qualified plans to collect on judgements. Someone, who is struggling to pay his or her debts should not give up this protection, and it is never a happy situation when someone deletes their 401k trying to pay off debts and ends up filing bankruptcy anyway.

As an alternative to withdrawing from a retirement plan, some plans allow the participant to take out a loan. Qualified loans from 401k plans or other qualified retirement or profit sharing plans must be repaid in five years, and the employee must repay the loan in basically level payments made at least quarterly. The interest portion of these payments are not deductible for tax purposes. The loans cannot exceed the lesser of $50,000.00 or the employees nonforfeitable balance in the plan.


Borrowing from a qualified plan is not an ideal solution to a financial crisis, since these loans can often prove difficult to repay; and the law treats a failure to repay as a taxable distribution from the plan. However, borrowing is better than a total withdrawal, because you still have the possibility of being able to repay the loan, and even if you fail to repay the entire amount you will receive the benefits of a qualified plan on the portion you do manage to repay.