How to calculate loan amount for 401k?

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Caduceus
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Joined: Mon Sep 17, 2012 1:47 am

How to calculate loan amount for 401k?

Post by Caduceus » Tue Dec 05, 2017 10:19 pm

My nephew wants to take out a 401k loan to go on a trip. I know it's a terrible idea but that's not what I'm asking. While looking through the Iphone snaps of the application form he sent me, I couldn't figure out how to go about calculating the amount he can actually borrow.

He can borrow half of his account balance up to $50,000. Assuming he is already 100% vested, is this account balance simply his current portfolio value, which will fluctuate every day? Or is the calculation based on his original employee and his employer contributions basis, which does not fluctuate? Or is it something else entirely?

bberris
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Joined: Sun Feb 20, 2011 9:44 am

Re: How to calculate loan amount for 401k?

Post by bberris » Tue Dec 05, 2017 10:55 pm

If the sponsor says he can "borrow" 50 % that means he can withdraw half the value of his account on that day. It is a little confusing because 401k loans are not really loans in the way a margin loan is. It is simply a withdrawal. Investments will be liquidated to fund the withdrawal, so his account will not be leveraged as with a margin loan.

ERISA Stone
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Re: How to calculate loan amount for 401k?

Post by ERISA Stone » Tue Dec 05, 2017 11:02 pm

Loan programs can be different, depending on the employee. Some plans limit the loan by source. Others allow participants to consider any source as long as it's 100% vested. The recordkeeper likely has some sort of website that lets him calculate the maximum amount available. It's usually the source balance (contributions plus earnings) that is considered. I suppose it's possible to limit the loan to contributions, but I've never seen that arrangement.

I assume he hasn't taken a loan within the last 12 months. If so, that could lower the amount currently available.

Caduceus
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Re: How to calculate loan amount for 401k?

Post by Caduceus » Wed Dec 06, 2017 5:41 am

ERISA Stone wrote:
Tue Dec 05, 2017 11:02 pm
Loan programs can be different, depending on the employee. Some plans limit the loan by source. Others allow participants to consider any source as long as it's 100% vested. The recordkeeper likely has some sort of website that lets him calculate the maximum amount available. It's usually the source balance (contributions plus earnings) that is considered. I suppose it's possible to limit the loan to contributions, but I've never seen that arrangement.

I assume he hasn't taken a loan within the last 12 months. If so, that could lower the amount currently available.
Thanks. I'm not familiar with the terminology. Isn't "source balance (contributions plus earnings)" just the current portfolio balance then? So if someone's original contribution is $100 and with earnings the current balance is $300, he can borrow 0.5 x $300. Is that about right?

ERISA Stone
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Re: How to calculate loan amount for 401k?

Post by ERISA Stone » Wed Dec 06, 2017 11:06 am

Caduceus wrote:
Wed Dec 06, 2017 5:41 am
ERISA Stone wrote:
Tue Dec 05, 2017 11:02 pm
Loan programs can be different, depending on the employee. Some plans limit the loan by source. Others allow participants to consider any source as long as it's 100% vested. The recordkeeper likely has some sort of website that lets him calculate the maximum amount available. It's usually the source balance (contributions plus earnings) that is considered. I suppose it's possible to limit the loan to contributions, but I've never seen that arrangement.

I assume he hasn't taken a loan within the last 12 months. If so, that could lower the amount currently available.
Thanks. I'm not familiar with the terminology. Isn't "source balance (contributions plus earnings)" just the current portfolio balance then? So if someone's original contribution is $100 and with earnings the current balance is $300, he can borrow 0.5 x $300. Is that about right?
Source means the source of the money, ie 401k, match, profit sharing etc. your example is correct. If there were no minimum loan balance (I set $1000 minimum for our plan) the participant would be eligible for a $150 loan based on a $300 balance.

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dm200
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Re: How to calculate loan amount for 401k?

Post by dm200 » Wed Dec 06, 2017 11:12 am

bberris wrote:
Tue Dec 05, 2017 10:55 pm
If the sponsor says he can "borrow" 50 % that means he can withdraw half the value of his account on that day. It is a little confusing because 401k loans are not really loans in the way a margin loan is. It is simply a withdrawal. Investments will be liquidated to fund the withdrawal, so his account will not be leveraged as with a margin loan.
I suspect the max amount is based on market value on the applicable date

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