Risk Premium versus Intrinsic Value

Course: Investment Planning
Lesson 5: Fundamental Equity Analysis

Student Question:

After reading the following, I’m confused about the amount a participant is allowed to take out as a loan from a qualified plan. Would it be up to $50k of vested account balance or only up to $10k?

Text states: As a general rule, a participant may borrow up to 50% of his or her vested account balance, not to exceed $50,000. However, a participant is permitted under ERISA rules to borrow up to $10,000 if he or she has a vested account balance of at least $10,000.


Instructor Response:

This is best illustrated by example.

Example 1

Serena has a balance in her 401(k) account of $150,000. She is 80% vested.  She is vested in $120,000 [calculated as .8 * 150,000].  In accordance with the general rule, she can a take loan of up to the lesser of one-half of her vested balance or $50,000; she can take a loan up to $50,000.

Example 2

Antony has a balance in his 401(k) account of $40,000. He is fully vested. Under the general rule, he can take a loan of up to the lesser of one-half of his vested balance or $50,000; He can take a loan of up to $20,000.

Example 3

Cleo has a balance in her 401(k) account of $10,000. She is fully vested.  ERISA would allow her employer to lend her $10,000.  This is an exception to the general rule.