What is the maximum allowable amount for a loan taken against a vested balance?

The maximum allowable amount for a loan taken against a vested balance is typically the lesser of 50% of the vested balance or a flat rate of $50,000, but since the context of this question specifies a choice, the amount would effectively be $25,000 when considering outstanding loans.

In this case, option C correctly outlines that the calculation for the maximum loan amount permits the borrower to take 50% of their vested balance, but it must also account for any current outstanding loans. This means if an individual has any previously taken loans from their 401(k), those amounts would reduce the amount available for a new loan.

The significance of this calculation is to mitigate risk and ensure that participants do not over-leverage their retirement savings. Therefore, when a 401(k) participant considers taking out a loan, their existing debt in the form of outstanding loans becomes crucial in determining the new maximum amount they can borrow, which makes option C the best representation of the rules governing 401(k) loans in relation to vested balances.