Which formula is used to calculate the maximum allowable loan from a retirement account?

The formula used to calculate the maximum allowable loan from a retirement account, specifically a 401(k), is based on the lesser of a specific percentage of the vested balance or a maximum dollar amount, taking into account any outstanding loans. The correct method considers 50% of the vested balance up to a maximum of $50,000, minus any amounts that are currently outstanding.

This means that if an individual has taken out loans previously, the amount of those loans is deducted from the maximum available loan limit. The idea is to ensure that borrowers do not exceed the legally permitted amount and to secure the plan's assets while allowing participants some liquidity when needed.

This approach offers a balance between providing access to funds for participants and the protection of the retirement savings for future needs. Other options do not accurately reflect the regulations around borrowing from a 401(k) plan. For instance, limiting the loan to a one-time salary deduction or using just the outstanding loan balance does not comply with IRS guidelines on retirement loans. The accurate calculation is crucial for both plan compliance and participant benefits.