Estimate the impact of taking a loan from your 401(k).
Loan Repayment Details
Monthly Payment: N/A
Total Paid Over Loan Term: N/A
Total Interest Paid: N/A
Remaining 401(k) Balance After Loan Repaid: N/A
Estimated Lost Growth on Loan Amount: N/A
Understanding Your 401(k) Loan
A 401(k) loan allows you to borrow money from your own retirement savings, typically without a credit check. While it offers easy access to funds, it's crucial to understand the financial implications. This calculator helps you estimate the costs associated with taking out a 401(k) loan, including repayment amounts and potential lost investment growth.
Key Considerations for 401(k) Loans:
Repayment Schedule: Loans usually must be repaid within five years, though longer terms are permitted for the purchase of a primary residence. Repayments are typically made through payroll deductions.
Interest: You will pay interest on the loan, but this interest is paid back to your own 401(k) account. The interest rate is often set by your plan administrator, usually a reasonable rate.
Lost Growth: The money you borrow is out of the market. This means you miss out on potential investment gains (compounding) during the period the loan is outstanding. This is a significant, often overlooked, cost.
Double Taxation: If you repay the loan with after-tax dollars, and then withdraw the money again in retirement (which is also taxed), you'll end up paying taxes twice on that portion of your savings.
Default Consequences: If you leave your job (voluntarily or involuntarily) before the loan is repaid, you may be required to repay the outstanding balance immediately. If you cannot, the outstanding balance may be considered a taxable distribution and subject to a 10% early withdrawal penalty if you are under age 59½.
How the Calculator Works
This calculator uses a standard loan amortization formula to determine your monthly payments and total interest paid. It then estimates the potential lost growth by assuming an average annual rate of return on your investments.
Formulas Used:
Monthly Payment (M): The formula for calculating the monthly payment of an amortizing loan is:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
Where:
n = Total number of payments (Loan Term in Years * 12)
Total Paid: Monthly Payment * Total Number of Payments
Total Interest Paid: Total Paid – Loan Amount
Estimated Lost Growth: This is an approximation. It considers the future value of the loan amount if it had remained invested, assuming a hypothetical average annual return. The calculation here is simplified:
Future Value of Loan Amount = Loan Amount * (1 + Assumed Growth Rate) ^ Loan Term
Lost Growth ≈ Future Value of Loan Amount – Loan Amount
(Note: A more complex calculation would involve monthly compounding and accounting for the fact that payments are being made, but this provides a general idea of the opportunity cost.)
Remaining 401(k) Balance: Current 401(k) Balance – Loan Amount
Example Scenario:
Suppose you have a $50,000 current 401(k) balance. You need to borrow $10,000 for home repairs. You choose a 5-year term and your plan charges an annual interest rate of 6%.
Monthly Payment: Approximately $193.33
Total Paid: $11,600.00
Total Interest Paid: $1,600.00
Remaining 401(k) Balance: $40,000.00
Estimated Lost Growth (assuming 7% annual return): The $10,000 could have grown significantly over 5 years. This lost potential gain is a key cost to consider.
Always consult your plan documents and consider speaking with a financial advisor before taking a loan from your 401(k).
function calculate401kLoan() {
var balance = parseFloat(document.getElementById("401kBalance").value);
var loanAmount = parseFloat(document.getElementById("loanAmount").value);
var loanTermYears = parseFloat(document.getElementById("loanTerm").value);
var annualInterestRate = parseFloat(document.getElementById("interestRate").value);
// Input validation
if (isNaN(balance) || isNaN(loanAmount) || isNaN(loanTermYears) || isNaN(annualInterestRate)) {
alert("Please enter valid numbers for all fields.");
return;
}
if (loanAmount <= 0 || loanTermYears <= 0 || annualInterestRate balance * 0.5) { // Common 401k loan limit
alert("Loan amount typically cannot exceed 50% of your vested balance. Please check your plan's rules.");
return;
}
var monthlyInterestRate = annualInterestRate / 100 / 12;
var numberOfPayments = loanTermYears * 12;
var monthlyPayment = 0;
var totalPaid = 0;
var totalInterest = 0;
var remainingBalance = balance – loanAmount;
var estimatedLostGrowth = "N/A";
if (monthlyInterestRate === 0) {
monthlyPayment = loanAmount / numberOfPayments;
} else {
monthlyPayment = loanAmount * (monthlyInterestRate * Math.pow(1 + monthlyInterestRate, numberOfPayments)) / (Math.pow(1 + monthlyInterestRate, numberOfPayments) – 1);
}
totalPaid = monthlyPayment * numberOfPayments;
totalInterest = totalPaid – loanAmount;
// Estimate lost growth (simplified)
var assumedGrowthRate = 0.07; // Assuming a hypothetical 7% annual growth
var futureValueOfLoanAmount = loanAmount * Math.pow(1 + assumedGrowthRate, loanTermYears);
var potentialLostGrowth = futureValueOfLoanAmount – loanAmount;
estimatedLostGrowth = "$" + potentialLostGrowth.toFixed(2);
document.getElementById("result-monthly-payment").textContent = "Monthly Payment: $" + monthlyPayment.toFixed(2);
document.getElementById("result-total-paid").textContent = "Total Paid Over Loan Term: $" + totalPaid.toFixed(2);
document.getElementById("result-total-interest").textContent = "Total Interest Paid: $" + totalInterest.toFixed(2);
document.getElementById("result-remaining-balance").textContent = "Remaining 401(k) Balance After Loan Repaid: $" + remainingBalance.toFixed(2);
document.getElementById("result-lost-growth").textContent = "Estimated Lost Growth on Loan Amount: " + estimatedLostGrowth;
}