Loans Can Become Instantly Payable
Not all 401(k) plans have a loan provision, and you should avoid raiding your 401(k) funds, anyway. Even so, it’s still nice to have such a provision built into your plan should an emergency need arise. In most cases, you can borrow up to 50% of your 401(k) value and pay back both principal and interest to your own account within five years or less.
But here’s the catch: If you leave your employer for any reason, your plan sponsor might require you to pay back the loan immediately. If you don’t, the amount of the loan might be reported as a taxable distribution. This can cause a serious cash flow problem right when you’re switching jobs — or, even worse, while you’re in between jobs.
