Borrowing From a 401(k) & Investing in Stocks

by Sara Melone

The vast majority of 401(k) plans allow the account holder to take out a loan from the account balance. This type of loan needs to be repaid just like a traditional bank loan, but it can be used for just about anything the account holder needs. Some owners of a 401(k) borrow from their accounts to make other types of investments, such as a home or stock. The interest you pay on a 401(k) loan goes directly back into your 401(k) account, so you pay yourself instead of a bank. If you are considering a loan for this purpose, you should know how to go about borrowing from a 401(k), and the conditions on such loans.

1. Calculate how much of a loan you require, and determine whether you have enough money available in your 401(k) account. Most plans require a minimum loan of between $500 and $1,000, according to Jeremy Vohwinkle, a retirement planning counselor writing for Generation X Finance. Standard plans also allow you to borrow as much as 50 percent of your vested balance, up to a total of $50,000.

2. Call your 401(k) plan's customer-service line or log into your online account to request your loan. Ask that a printed hard copy of the loan terms be sent to your home, or print a copy directly from your account online. Review the loan provisions carefully before you agree to the loan. Some plans charge substantial fees for a 401(k) loan, and it's important to know these fees upfront to understand the full cost of your investment. Take note of the repayment terms, including how long you'd have to repay the loan, what interest rate you'd pay, and whether the loan installments would be taken directly from your paychecks.

3. Deposit the loan proceeds into your stockbrokerage account, and make your investment as usual. Keep in mind that you are required to repay your 401(k) loan regardless of how your stock investment performs. Consider repaying your 401(k) loan at a faster rate if your stock investment does turn out to be profitable.

4. Contact your 401(k) plan administrator to determine what investment options are available directly through your 410(k) account. Most 401(k) plans invest the funds in assets such as stocks, bonds and mutual funds. In many cases, you have significant input in deciding on your plan's asset allocation, according to CNN Money. You can even decide what percentage of your money is invested in which types of stocks or mutual funds. Ask the plan administrator whether you can allocate a portion of your 401(k) funds to be invested in the stock of your choice instead of taking out a loan, and by making the investment directly through your stock trading account.

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