# 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.