The pros and cons of 401(k) loans

Check with your employer, because each employer sets up the parameters for their 401(k) plan. Most employers do allow loans. There might be limits in terms of how many loans you can have out at one time. More and more employers are only allowing you to have one loan at a time. – Mike Shamrell, vice president of thought leadership at Fidelity

Generally, it's $50,000 or half of your balance, whichever is lower. So let's say you have $80,000 in your 401(k), that would mean you could only take $40,000 out. – Mike Shamrell, vice president of thought leadership at Fidelity

For a 401(k) loan, you don't necessarily need to have any reason. You will pay your loan back, and you are somewhat limited in terms of how much you can borrow. A hardship withdrawal is a little different in that you have to qualify for that; the IRS has very specific guidelines. If you qualify for a hardship withdrawal, you don't necessarily have to pay that back, but you likely will face taxes and penalties on the amount that you withdraw. – Mike Shamrell, vice president of thought leadership at Fidelity

The loan repayments are similar to your 401(k) contributions, which are automatically taken out of your paycheck and put into your 401(k). Your loan repayments are automatically taken out as well, which means your take-home pay will go down. You can set the length of time to repay it, but usually no longer than five years. Bear in mind that there's going to be interest payments set by your employer, but in general, it's usually the prime rate plus 1. – Mike Shamrell, vice president of thought leadership at Fidelity

The potential downside is: that money is out of your 401(k), so if there are positive market conditions for that period of time, that money is not going to be able to grow. This could, under various scenarios, have a negative effect on your ultimate ability to hit your long-term retirement goals. – Mike Shamrell, vice president of thought leadership at Fidelity

You are required to pay back loans in a very short period of time, usually 30, 60, or 90 days—but no longer than 90 days. If you’re not able to pay it back in full, whatever you haven't repaid is viewed by the government as a distribution, which means there's going to be a 10% penalty as well as applicable taxes. But 401(k) loans are not reported to any credit bureaus, so they don't have any impact on your credit score. – Mike Shamrell, vice president of thought leadership at Fidelity

Make sure that you're taking a 401(k) loan for the right reasons. Is this something that is an immediate expense that needs to be addressed right away? Or is this something that you could save up for to address later? While you're repaying the loan, that money is not going to be in your 401(k), so it's not going to be able to take advantage of any positive market performance, which in the long run could have an impact on your retirement savings. Your take-home pay is going to go down as you start making loan repayments, so you need to work that into your budget. However, 401(k) loans can sometimes make the most sense. If you’re faced with an immediate financial need and the choice is a 401(k) loan, a high-interest credit card, a payday loan, or some other source that might not be in your best financial interest, a 401(k) loan could be a viable option. – Mike Shamrell, vice president of thought leadership at Fidelity