Getting the most out of your 401k plan

Hi, My name’s Josh Tanner and I presently work as a marketing manager. I’ve been working with my current employer for more than a decade now and have a 401 (k) plan with them. Getting to the point, I’m in a financial bind of sorts now, as my daughter will be starting college soon. I desperately need the funds for her tuition fees and was told that I could take a loan on my 401 (k). Is this possible and if so, how do I go about it and what are the conditions?

Hi, Josh. Good to hear from you and your question is a very valid one. In fact, we get quite a few of these. So, to answer your first question, yes! You can take a loan from your 401(k) account. However, it all depends on the policies implemented by your employer. The 401 (k) is primarily meant to be a retirement savings fund and taking loans is usually discouraged. However, some employers do let their employees borrow from it. But, there are certain eligibility criteria to be met. For instance, some employers allow loans only in the case of medical emergencies, home loan payments or funeral expenses. Some employers don’t give out 401 (k) loans at all or there might be several conditions that you might have to fulfill. So, you will have to talk to your employer about their 401 (k) loan policies.

Secondly, as far as procedures are concerned, they are quite simple. You will, most likely, be required to fill up a set of forms. You’ll just need to enter details regarding how much you want to borrow and which investments need to be converted to cash. After which, the money will be deposited to your bank account. Other than that, you might also be required to provide specific details of your situation and provide the necessary documentation supporting it.

Here are a few more things you need to know:

  • There may be a limit on how much you can borrow from your 401 (k).
  • You will have to pay interest. Though, this interest is paid from your own account, you will still miss out on market gains.
  • You will have to pay double taxes – On the after-tax dollars which you’ll pay the loan back with and the final withdrawal which you will make at the age of 59 and a half.
  • In the case of a lay-off, you will have to pay back the loan in as little time as two months.

The positives on the other hand include low interest rates, less paperwork, and no damage to credit even in the case of a default.

Nevertheless, loans on a 401 (k) are still risky as you’ll be losing money from your retirement savings. Some employers will even prevent you from making your pre-tax contributions into the 401 (k), if you have an outstanding loan. So, think twice.

To know more about borrowing from your 401 (k) account, just visit www.401Keasy.com. The site is a great resource for all 401 (k) related queries and can come in handy.