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The majority of 401(k) plans and a growing number of 403(b) plans let you borrow money from your account. A typical plan would allow you to borrow up to 50% of your balance, but not more than $50,000. Use this calculator to help you determine if you should borrow from your account and the potential impact on your retirement savings.
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Definitions
- Current 401(k) or 403(b) balance
- The starting balance or current amount you have invested or saved in your 401(k) or 403(b).
- Annual rate of return
- The annual rate of return for your 401(k) or 403(b) account. This calculator assumes that your return is compounded annually and your loan repayments are made monthly. The actual rate of return is largely dependent on the type of investments you select. The S&P 500 for the ten years ending on December 31st, 2011 had an annual compounded rate of return of 2.92%, including reinvestment of dividends. From January 1970 through the end of 2011, the average annual compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 10.01% (source: www.standardandpoors.com). Since 1970, the highest 12-month return was 61% (June 1982 through June 1983). The lowest 12-month return was -43% (March 2008 to March 2009). Savings accounts at a bank may pay as little as 0.25% or less but carry significantly lower risk of loss of principal balances.
It is important to remember that these scenarios are hypothetical and that future rates of return can't be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index and the compounded rate of return noted above does not reflect sales charges and other fees that funds and/or investment companies may charge.
- Loan amount
- The amount you are planning to take out as a loan from your 401(k) or 403(b) account. Loans are normally limited to the lessor of 50% of your balance or $50,000. Contact your plan administrator regarding the actual limits on your specific account.
- Loan interest rate
- The annual interest rate paid on this loan. We assume that the monthly rate is one twelveth the rate entered. All payments are made monthly. Since loans balances have interest that is normally compounded monthly, and investment rates of return are stated annually (and compounded annually), more interest will be paid on a loan with the same stated interest rate as the expected rate of return on your 401(f) or 403(b) balance.
- Loan term
- Number of years to repay your 401(k) or 403(b) loan. Depending on your plan, there may be limits on your repayment term. Typically, if you leave your employer before your loan is repaid, you may be required to repay the entire outstanding balance immediately. If you are unable to repay the loan balance, the balance may be considered a early distribution and subject to income taxes and early withdrawal penalties.
- Income tax rate
- The marginal income tax rate you expect to pay. Use the table below to assist you in estimating your Federal 2012 tax rate. You may also wish to increase your marginal tax rate to also account for any state income tax.
| 10% |
$0 - 17,400 |
$0 - 8,700 |
$0 - $12,400 |
$0 - 8,700 |
| 15% |
$17,400 - 70,700 |
$8,700 - 35,350 |
$12,400 - 47,350 |
$8,700 - 35,350 |
| 25% |
$70,700 - 142,700 |
$35,350 - 85,650 |
$47,350 - 122,300 |
$35,350 - 71,350 |
| 28% |
$142,700 - 217,450 |
$85,650 - 178,650 |
$122,300 - 198,050 |
$71,350 - 108,725 |
| 33% |
$217,450 - 388,350 |
$178,650 - 388,350 |
$198,050 - 388,350 |
$108,725 - 194,175 |
| 35% |
over $388,350 |
over $388,350 |
over $388,350 |
over $194,175 |
Source: Revenue Procedure 2011-52 http://www.irs.gov
- Interest rate of other debt
- If you are using this loan to pay off other outstanding debt, enter the interest rate for that debt here.
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