Getting the most out of your 401k plan

I am not in my best financial condition and might do better with extra monetary aid. I was wondering if my 401(k) account can be if any use to me presently. Can I borrow from it? Would it be advisable? – Howard Burgess

A bad financial condition and tighter lending regulations by banks may tempt you to withdraw money from your 401(k) account, Howard. However, it may not always be a wise choice. A 401(k) plan can allow you to borrow up to half the plan’s balance or $50,000, whichever is less.

Howard, you should consider the following things before withdrawing from your 401(k) account:

  • If you are terminated by your employer after you have borrowed from your 401(k) account, then you will have to repay the borrowed amount typically within 60 days. Any unpaid amount will be considered as a retirement distribution and it will be subject to income tax, probably along with a 10 percent penalty because of early withdrawal.
  • Contributions to your 401(k) account are pre-tax, but when you pay a 401(k) loan it will be repaid with after-tax dollars. Also, when you withdraw from 401(k) account during retirement, the amount will be taxed again. So, you will have to pay the tax twice in such a case.
  • Some employers may have a rule wherein employees won’t be allowed to contribute to their 401(k) account while they have an outstanding loan. It means that the balance of your 401(k) account won’t increase during that period. As you will not be making any pre-tax contributions, your total taxable income may increase.

As a 401(k) account is for your retirement savings and not for borrowing, you might want to have a look at other alternatives:

  • You can opt for a home equity loan when you have an equity in your house.
  • If you are facing a difficult situation, then you may be able to obtain a taxable withdrawal from your 401(k) account instead of taking a loan. In some adverse circumstances like medical costs, you may escape a 10 percent penalty due to an early withdrawal if you are less than 59 years old.
  • You can escape a 10 percent penalty due to an early withdrawal by exploring 72(t) withdrawals if you have an IRA. The withdrawal will still be taxable.

The interest rates on your 401(k) loan are less compared to the interest rates on personal loan obtained from banks. However, given the possibility of fines, double taxation, and missed saving chances, it will not be wise to borrow from your 401(k) account. Also, you may want to manage your 401(k) account with 401k Easy that makes the whole process simple for you.

About Elliot Earl, Director, Pension Trade Association
Director, Pension Trade Association Founded in 1982, the Pension Trade Association [California Domestic Nonprofit Corporation #C1629080] is dedicated to helping workers save for their retirement through expanded coverage of 401k -type defined contribution pension plans.

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