Repayment of a retirement plan loan must, in most cases, be repaid in full within 5 years and must be paid in substantially equal payments representing principal and interest at least quarterly. Most plans, however, require you to make monthly payments. The only exception that the IRS makes for loan repayment duration is when you take a loan for the express purpose of buying a house that will be used as your principal residence. In this case, you may be eligible to pay the loan back over a period of more than 5 years.
Most retirement plan loan repayments are handled by simply reducing your paycheck by the amount of the loan payment. Make sure you have some level of job security, however, if taking a loan from a retirement plan because some plans consider a loan in default when you leave employment and are no longer able to repay your loan via payroll. If you are unable to completely repay your retirement plan loan for any reason, the loan is considered in default and the entire outstanding loan balance is considered a “deemed distribution” by the IRS. This means that the entire outstanding loan balance is immediately charged to you as income, with all of the applicable taxes and potential penalties included. The good news is that a retirement plan loan default will not negatively affect your credit in any way; however, the plan may limit your future loan eligibility.
To better understand the potential pitfalls associated with borrowing from your retirement account, check out this related post.
