Taking a loan from your 401(k) can seem like an attractive option for accessing funds without early withdrawal penalties. However, it's crucial to understand the implications, including the interest you'll pay (to yourself), the potential impact on your retirement savings growth, and the loan limits imposed by the IRS.
How the 401(k) Loan Calculator Works
This calculator helps you estimate key aspects of a 401(k) loan. It uses standard financial formulas to provide insights into:
Estimated Payment: Based on the loan amount, interest rate (typically a reasonable market rate, often prime rate plus a small percentage, set by your plan administrator), and loan term, this shows your regular repayment amount.
Total Interest Paid: Calculates the total interest you will pay back over the life of the loan. While this interest goes back into your 401(k) account, it's important to see this as a cost you are effectively paying yourself, diverting funds that could have grown through market performance.
Potential Growth Lost: This is a crucial but often overlooked aspect. When you take a loan, that portion of your 401(k) balance is removed from market investments. This section estimates the potential growth that money could have achieved if it remained invested, assuming a reasonable average annual rate of return. This helps illustrate the opportunity cost of borrowing.
Loan Limit: The IRS generally limits 401(k) loans to the lesser of $50,000 or 50% of your vested account balance. This calculator checks your eligibility based on these limits.
Key Considerations Before Taking a 401(k) Loan:
Repayment Terms: Loans must typically be repaid within five years, unless used to purchase a primary residence. Payments are usually deducted directly from your paycheck.
Interest Rate: The interest rate is set by your plan administrator. While you pay yourself, this interest is still subject to income tax when withdrawn in retirement if it was paid with pre-tax dollars.
Lost Growth: The most significant cost is the potential lost investment returns on the borrowed amount. Market downturns can exacerbate this loss.
Default Consequences: If you leave your job (voluntarily or involuntarily) while the loan is outstanding, the entire balance is often due immediately. Failure to repay can result in the outstanding balance being treated as a taxable distribution, subject to income tax and a 10% early withdrawal penalty if you are under age 59½.
Double Taxation: If you repay the loan with after-tax dollars and then withdraw the principal and interest in retirement, that money is taxed again.
Disclaimer: This calculator provides estimates for educational purposes only and does not constitute financial advice. Consult with your plan administrator and a qualified financial advisor before making any decisions about taking a 401(k) loan.
function calculate401kLoan() {
var loanAmount = parseFloat(document.getElementById("loanAmount").value);
var loanTerm = parseInt(document.getElementById("loanTerm").value);
var vestedBalance = parseFloat(document.getElementById("vestedBalance").value);
var annualSalary = parseFloat(document.getElementById("annualSalary").value);
var annualRateOfReturn = 0.07; // Assumed average annual rate of return (7%) for lost growth calculation
var loanInterestRate = 0.05; // Assumed loan interest rate (5%) – This is paid back to yourself. Plan administrators usually set this.
// — Input Validation —
if (isNaN(loanAmount) || loanAmount <= 0) {
alert("Please enter a valid loan amount greater than zero.");
return;
}
if (isNaN(loanTerm) || loanTerm <= 0) {
alert("Please enter a valid loan term in years greater than zero.");
return;
}
if (isNaN(vestedBalance) || vestedBalance < 0) {
alert("Please enter a valid vested balance.");
return;
}
if (isNaN(annualSalary) || annualSalary maxLoanByIRS) {
document.getElementById("loanLimit").textContent = "Exceeds IRS Limit ($" + maxLoanByIRS.toFixed(2) + ")";
document.getElementById("loanLimit").style.color = "red";
} else {
document.getElementById("loanLimit").textContent = loanLimitDisplay;
document.getElementById("loanLimit").style.color = "#004a99"; // Default color
}
// — Loan Payment Calculation (Amortization) —
var monthlyInterestRate = loanInterestRate / 12;
var numberOfPayments = loanTerm * 12;
var monthlyPayment = 0;
var totalInterestPaid = 0;
var potentialGrowthLost = 0;
if (monthlyInterestRate > 0) {
monthlyPayment = loanAmount * (monthlyInterestRate * Math.pow(1 + monthlyInterestRate, numberOfPayments)) / (Math.pow(1 + monthlyInterestRate, numberOfPayments) – 1);
} else {
monthlyPayment = loanAmount / numberOfPayments; // Simple division if interest rate is 0
}
totalInterestPaid = (monthlyPayment * numberOfPayments) – loanAmount;
// — Potential Growth Lost Calculation —
// This is an approximation. It assumes the loan amount would have grown at the assumed annualRateOfReturn.
// A more complex calculation would consider compounding and the portion of the loan balance remaining over time.
// For simplicity, we'll calculate the total potential growth on the principal amount over the loan term.
var futureValueIfInvested = loanAmount * Math.pow(1 + annualRateOfReturn, loanTerm);
potentialGrowthLost = futureValueIfInvested – loanAmount;
// — Display Results —
document.getElementById("estimatedPayment").textContent = "$" + monthlyPayment.toFixed(2) + " / payment";
document.getElementById("totalInterestPaid").textContent = "Total Interest Paid: $" + totalInterestPaid.toFixed(2);
document.getElementById("potentialGrowthLost").textContent = "Estimated Lost Growth: $" + potentialGrowthLost.toFixed(2);
// The loan limit is already handled above, but we can re-ensure it's visible
// document.getElementById("loanLimit").textContent = "Max Eligible Loan: $" + maxLoanByIRS.toFixed(2);
}