Editing 401(k) (section)

===Loans===
Many plans also allow participants to take [[loan]]s from their 401(k). The "[[interest]]" on the loan is paid not to the financial institution, but is instead paid into the 401(k) plan itself, essentially becoming additional after-tax contributions to the 401(k). The movement of the principal portion of the loan is tax-neutral as long as it is properly paid back. However, the interest portion of the loan repayments are made with after-tax funds but do not increase the after-tax basis in the 401(k). Therefore, upon distribution/conversion of those funds, the owner will have to pay taxes on (only) the interest funds a second time.<ref>Guerra, Tony. "[http://homeguides.sfgate.com/can-use-401k-funds-purchasing-second-home-tax-penalties-48576.html Can You Use Your 401(k) Funds for Purchasing a Second Home Without Tax Penalties?]" ''Demand Media''. Retrieved on January 29, 2014.</ref>

The loan principal is not taxable income nor subject to the 10% penalty as long as it is paid back in accordance with section 72(p) of the Internal Revenue Code.<ref>{{USC|26|72}}(p)</ref> This section requires, among other things, that the loan is for a term no longer than 5 years (except for the purchase of a primary residence), that a "reasonable" rate of interest be charged, and that substantially equal payments (with payments made at least every calendar quarter) be made over the life of the loan. Employers, of course, have the option to make their plan's loan provisions more restrictive. When an employee does not make payments in accordance with the plan or IRS regulations, the outstanding loan balance will be declared in "default". A defaulted loan, and possibly accrued interest on the loan balance, becomes a taxable distribution to the employee in the year of default with all the same tax penalties and implications of a withdrawal.