What are the things you need to know before taking out a 401(k) loan?

Q. I am currently in a tight financial situation. The company I have worked in for over ten years offers a 401(k) plan to its employees. I was thinking of taking out some amount from my 401(k) account as a loan. However, I have heard that this may not always be the best option. I wanted to know more about how a 401(k) loan works, and any other thing that will be of help. Scott, Wisconsin

Hi Scott, while you may be tempted to take out a 401(k) loan, it is true that it may not always be the best option since failure to repay will have serious consequences. Consider it your last resort if you have no other options. Many people think that since you are borrowing your own money, it is a simple process. But the truth is that taking out a 401(k) loan is not as simple as it sounds.

If you still think that borrowing from your 401(k) plan is the way to go, then there are some things to keep in mind. The first thing you have to check is how much you can borrow. Usually, the limit is set to 50 percent of your retirement plan or $50,000 – whichever is the lesser amount.

When borrowing from your 401(k) plan, you don’t have to go through a credit check since you are taking out your own money; no financial institution is loaning you the money.

However, even though you do not have to run a credit check, you still have to pay the interest. The interest rate depends upon your loan plan, which is usually based on the current industry rates. Apart from this, taking out a 401(k) loan will also require you to follow a strict repayment schedule. This means that you have to pay back your loan, along with interest, within five years. However, if you use the loan to buy a home, the period for repayment is usually more than ten years.

Lastly, make sure that you do not miss any of your payments. Failure to repay your 401(k) loan on time will have some serious repercussions. If you miss a payment, your employer will regard it as you withdrawing from your 401(k) plan. This means that not only will you have to pay taxes on the loan you take out but also pay the penalty for withdrawing from your retirement plan early.

Getting the most out of your 401k plan

“Hi, I just, recently, quit my job for a new one . I had enrolled into a 401(k) plan with my previous employer and would like to open a separate one with my new employer. Is it possible? What do I need to know about it? How should I get started with the process?”

Travis Jones,West Palm Beach, FL 33401

Hi Travis. You will be pleased to know that you can have more than one 401(k) plans. Thankfully, the Internal Revenue Service (IRS) does not restrict or prevent anyone from having multiple 401(k) plans. However, there are some conditions to the benefit.

For starters, there are certain limits to your 401(k) contributions. As of 2012, the IRS permits you to deduct only up to a maximum of $17,000 from your chosen 401(k) plans. If you are 50 or older, then the limit is raised to $22,000. The rule is applicable on all your plans and not just specific ones. It means is that, if you are below the age of 50 and have two 401(k) plans, then you can contribute $10,000 to one plan and no more than $7000 to the other.

Similarly, the rule also affects your contribution for lower plan limits. If your 401(k) plan has a set lower limit in terms of contribution, then you cannot contribute more than the set limit. For example, if you have one 401 (k) with a contribution limit of $6000 and the other plan has a set limit of $7000, then your total contribution in this case will be limited to $13,000 and not $17,000.

However, you also need to be aware of the consequences of making excess contributions. If you end up making excess contributions and do not correct them, you will be asked to pay taxes twice on the surplus amount. You will have to pay tax while depositing money and also while taking distributions. For example, if you contribute an excess of $5000 in an year to your 401(k) plan, then you will have to include the exact amount as taxable income when you file your tax returns. The amount will also be taxed when you withdraw it for retirement as the excess contribution does not establish a basis in your 401(k) plan. So to avoid the unnecessary penalty, you must withdraw the excess amount before filing your taxes. Also, the 10 percent early withdrawal penalty does not apply to the correction of excess contributions.

There are quite a few benefits to owning multiple 401(k) plans. To know more about the topic, consider visiting websites such as www.401keasy.com. You’ll find all the information you need about 401 (k) plans on the website.

Getting the most out of your 401k plan

“Hi, I just quit my job and would like to empty my 401k account to support me till I find a new one. I contacted my HR rep at the previous company and he told me that I was allowed to withdraw the money only in the case of a serious “financial hardship”. Is this true and what is the definition of a financial hardship with regard to withdrawing my 401k? Is there any other way I can withdraw my 401k apart from “financial hardship”?

– Tony Baker

Hi Tony,

This is not an uncommon question and I get quite a few asking the same thing. This particular question does the rounds because most employers fail to provide adequate information to their employees about the 401k plan. Especially,when it comes to withdrawal options and conditions.

Getting to the point now, the first thing you need to know, Tony, is that a 401k is primarily a retirement fund to help you out in your old age. It is not some sort of piggy bank savings scheme from which you can withdraw money whenever you like.

However, as your HR rep mentioned, the 401k fund can be withdrawn in case of a financial hardship. However, even hardship withdrawals come with a 10 percent penalty for early withdrawal and you will have to fulfill certain conditions. These conditions will also answer your question about the definition of a financial hardship.

So, financial hardship under 401k means covering costs related to medical expenses, funeral expenses, fixing damages to your primary residence, and to cover costs that prevent eviction or foreclosure. You can also claim a hardship withdrawal if you are planning to go to college. It will cover your tuition fees and other associated expenses such as accommodation or boarding.

The other withdrawal option is a penalty-free one, but you will be required to pay taxes equal to standard income tax rates. Just like the conditions in the previous hardship withdrawal option, the penalty-free hardship withdrawal also comes with certain conditions. They include covering costs in the case of a disability that prevents you from continuing your employment, medical expenditures within the allotted limit, and for court ordered payments towards divorced spouse, children or dependents. You can also claim the penalty-free hardship withdrawal if you have been allowed a relief by the IRS in the case of a disaster.

Penalty-free hardship withdrawals are also valid in the case of an early retirement. However you must establish a fixed regular withdrawal schedule for a period of 5 years or up to the age of 59.5, whichever is applicable in your case.

I suggest you do some research to know more about 401k withdrawals. Websites such as www.401keasy.com have a lot of information about 401k plans, including information about withdrawals. So, take a look and you’ll get to know your options.

Feature-rich 401k at Affordable Cost

I run a small carpentry workshop at home. I want a 401k plan that is pocket friendly but gives me more than a bare bones version. In particular, I want good security and sufficient investment options. Am I asking for the impossible?-Alfred J. Ryals, 3912 Pleasant Hill Road, West Palm Beach, FL 33401

Alfred, you are definitely not asking for the impossible! In fact, you are just trying to make sure that you have a perfectly adaptable 401k that safeguards your savings in the best possible way. What you should look for is a plan that offers you a good choice of no- load mutual funds so that you effectively diversify your investment. In addition, you should also be ensuring that the plan you choose is not pricey when compared to similar plans in the market.

Today, there are many such plans available for small business owners like you. At http://www.401keasy.com/, you will find that ‘ultra low cost’ means no surprises in the form of hidden fees, commissions and asset-based charges. Since 401k Easy also gives you an unlimited choice of  no- load mutual funds to pick your favorites from, this could be the best option for you. Its 401k is feature packed and you are sure to find right here all the functionalities that big company plans usually have, with the bonus that you can get them all within your budget. Don’t hesitate to compare prices with other plans before you make your choice.

Another aspect to check when you are doing your comparison shopping is whether all the 401k suites on your ‘list of possibles’ give you great security features. The 401k Easy plan comes with secure online administration. This makes the plan doubly attractive because you don’t want sensitive personal information about your retirement savings strategy leaking out into cyberspace or among your competitors.

While you are at it, do check out if a demo version is available so that you can actually get a hands- on feel for the 401k suite. You can check for yourself if it is easy to use, intuitive and clutter free. Remember that you will need to update information on a monthly basis. A complicated 401k package will need a lot of time and effort-investment month after month simply to plug in the latest figures. That can get really tedious after a while and the extra complications only increase the risk of human errors cropping up. Go for simplicity, security and a good range of investment options.

401Ks for the Smallest of Small Businesses

I run a small electronics store where I employ less than 5 people. Is my business too small for a 401k? – Joan Mello, Arkansas.

Actually, a 401K plan is meant for businesses of any size. You can even open a 401K retirement plan if your small business only employs you and your spouse. This kind of 401K is called a solo plan. But for your ‘less than five employees’ electronics store, you can open a regular 401K plan. As yours will not be a solo plan, you also qualify for the $500 IRS tax credit for the first three years. This credit is available for all businesses that employ less than 100 people and have costs exceeding $1000.

You can set up a profit sharing or contribution match system to get some more tax advantages. All your contributions to your employee’s 401K plan are deductible for tax purposes.

Setting up and administering your 401K plan has become really easy now. There are many reliable software suites, including those from the likes of http://401keasyonline.com/, which offer comprehensive solutions for just this purpose. Simply sign up with them online, and you can set up and manage your 401K plan online or choose a PC based suite in line with your preferences. No matter which one you opt for, all you need to do is spend a few minutes on payday for each of your five employees, updating their 401k plan records and you are done. The software takes care of the record keeping and managing tasks. Choose one of these options and set up a 401K plan for your electronics store right away to start saving on tax.

401k Saves Money for Small Businesses

People tell me that not all small businesses have 401k plans for employees. Can I avoid having one too and save money on matching contributions?- Clare Eickhoff, Owner of Boutique, Fremont, Idaho

Your business is not compelled to have a 401K plan for the employees. But, it makes good business sense for you, the business owner, to set one up. A 401k plan is not, contrary to popular belief, a plan that benefits just your employee.  It is a great tax saving tool for the business owner as well. Here is why the tax break alone makes it worthwhile for you to start thinking about a 401k today.

Most small businesses are eligible for federal tax credits. This means that if your business qualifies for this credit, you could get up to $500 tax credit in a year for a period of three years during the initial part of the plan.  This is quite an attractive tax break for a small business. Also, your contributions to your employee’s plans are tax deductible.

In addition to the savings you get, you also improve employee morale by offering a savings plan for their future. The 401k plan shows that you care about the welfare of your employees. By making matching contributions to the employee’s 401k, you can build loyalty among your staff.

If you are hesitant to open a 401k because you do not want to spend hours managing or even setting up the account, then there is a simple solution for you. Simply opt for a ready to use software suite like http://401k-easy-online.com. With this suite, you can have your 401k plan set up and running in an unbelievably short time. Managing the plan, keeping track of contributions and withdrawals and updating records is just as simple and quick and requires just minutes of your time every month.

Understanding the Requirements for Solo 401k Plans

I run a small business but it’s not a sole proprietorship. Can I opt for a Solo-401k? – Jeannette Lemos, Delaware

Many small business owners fail to take advantage of the benefits that a Solo 401K plan offers because they are under the misconception that this plan is only for sole proprietorships. The fact is that not just sole proprietorships, but corporations and partnerships can set up and use this plan too. The only criterion is that the business owners should be the only eligible participants to the plan.

There are several financial institutions that offer 401k plans especially designed for small businesses. These plans may be variations of their regular 401ks or special plans created just for this purpose. If you have been searching unsuccessfully for SBO-401ks with banks, mutual funds or insurance companies in your locality, it may just be a simple case of their calling it by a different name. The SBO-401k is also called the Solo 401k, Individual 401k, Uni-K plan or Self employed 401k. Just ask your bank or insurance company to tell you about the 401ks they have for small businesses. A simpler option is to set up the plan yourself and manage it on your own with a DIY 401k package such as the one offered by http://401keasyonline.com/

One important point to remember is that you need not have a business that has only you and your spouse as employees to adopt the SBO-401k. Your business can employ other staff members. But for you to adopt this special 401k for small businesses, these employees should not fulfill the eligibility criteria you choose for your 401k. If they do, then the SBO-401k is not for your business.

This makes it necessary for you pay extra attention when determining the eligibility requirements for the plan. The requirements should be such that you are eligible but your current employees are not. Remember that even if your spouse is an employee of your business and he/ she meets the eligibility criteria, you can still adopt the SBO-401k because, by law, your spouse is treated as an owner of your business.

Types of 401k Plans for Small Businesses

I know about the traditional 401k plan. Are there other kinds I can choose for my small business? – Della Freeman, Texas

There are actually three kinds of 401k plans you can choose from if you want to set up a retirement plan for your small business. Here’s a brief overview of your options:

The traditional 401k is the most flexible among the three without doubt. As the employer, you choose if you want to make contributions towards every employee or match employee contributions. You can have a clause in your traditional 401k plan outline describing the vesting schedule you want for the contributions. Overall, this plan gives you much more control than the other two over how you and your employees make contributions.

A safe harbor 401k is the second type of retirement plan you can choose for your small business. Employer contributions are mandatory with these plans. You have to put in a certain level of contribution towards these plans for your employees. There is a variant of this plan you can opt for- the DASH or double advantage safe harbor 401k. With this plan, you add a profit sharing plan to your 401k that makes it interesting for your employee. The bigger tax benefits make it attractive for your business.

An automatic enrollment 401k is the third option you can choose. Every employee is automatically a participant in the plan and deductions are made directly from his/her paycheck every month and go right away into the 401k. You select default investments for your employees. But, you have the liberty to change the preferences if you so choose. This gives you enough flexibility with your contribution to ensure continued participation.

If you already have a 401k in place you can simply switch to one of these options by making use of a 401k software suite like the one offered by http://401k-easy-online.com/. With this kind of package you can take care of all the administration and tracking that is needed to be done with 401ks easily and quickly.

Avoiding Middlemen in your 401k Plan

Is there any way in which I can interact directly with mutual fund companies when I or my employees want to invest 401k funds in these investment products? I would like to avoid paying charges to any third parties and keep my 401k plan affordable.- James J. Silver, runs a interior decoration business in Madison, WI 53703.

Yes, you can set up a 401k plan that lets you interact directly with mutual fund companies when you want to add these investment products to your plan. There are a number of run- it- yourself 401k plans on the internet that let you do this. By choosing a tried and tested plan like the one offered by http://401k-easy.com/, you can make plan administration easy and quick and also avoid paying charges and fees to middle men.

Administration of these DIY 401k plans is quite easy once you take a look at the demo offered by the provider. You can actually set up the plan and have it ready to go without having to hire outside help. Once your plan is up and running, it takes just about 15 minutes for you to update records each month. Make sure that you choose a DIY 401k plan that you can customize to your specific needs. This will let you choose the investments that your employees and you are most likely to use. It will also give you the greatest flexibility in terms of making changes at a future date if the need arises.

The best part about such DIY software suites is that they are very cost effective when compared with the plans that large providers establish and administer for you. You can literally save thousands of dollars every year with these easy to use plans because there is no administration fees involved when you manage the plan on your own. Try out a free download of the software suite before you sign up to ensure that you can follow the instructions and manage the plan easily.

Why Set Up 401k Plans?

Why should I choose a 401k plan for my graphics design business? My employees can save with IRAs or other savings schemes. – Elizabeth R. Halliway, Stevens Point, WI 54481

The 401k plan became a very popular way for businesses to help employees save for their future once the changes outlined in the EGTRRA came into force in 2001. Since then this retirement saving plan has become particularly popular among small businesses. Businesses owners who have this plan give their employees a simple, effective and tax advantaged means of making sure of a financially secure retired life. This makes them great employers to work for. Result- the business can attract the best of the talent in the market. This is also one of the simple ways in which businesses make sure that good employees stay with them and don’t get lured away by bigger or better paying competitors.

While your employees can definitely save in other ways including IRAs, the 401k plan gives them some special benefits that no others do. One of the most attractive aspects of the 401k plan is that your employee’s contribution comes out of pre- tax dollars. Every month, his taxable income is reduced to the extent that he contributes to his 401 plan. This means that he cuts down his tax bill too. When he withdraws from his 401k account post- retirement he pays tax at the lower tax rate that he then falls within.

If you are setting up a 401k plan using a DIY software suite like http://401keasy.com/, you give your employees a great deal of control over their retirement savings too. They have the flexibility to choose their preferred investments out of a comprehensive range of options. This lets different employees invest in different avenues in line with their risk appetite and returns expectations. Since they can easily track the status of their 401k account, employees find it immensely convenient when you establish such a DIY 401k plan for your business too.