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.

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.

Can the Employer Limit the Employee Contribution to 401Ks?

I run a boutique in Phoenix and employ 6 people. Do I have any control over how much of their salary goes into the 401K?- Jessie Marco, Phoenix, Arizona.

Your employees have a lot of freedom in deciding the amount they contribute to their 401K from their paychecks. However, you do have a say in this issue. Typically, it is ideal for you to encourage your employees to stick to the 15% of paycheck limit to make contributions. But you can lower this limit if you have some strong reasons to do so.

If you do offer a lower contribution limit, then your employees can make a special request to raise the bar for their contributions. While you can reject the request, it is a good idea to remember that the 401K is one of the best ways for your employees to save for their retired future. Given this, letting them save as much money as the IRS allows is definitely in their best interests. And taking care of their best interests is a great way to boost employee morale and raise productivity levels.

At a later date, if and when it becomes necessary to tweak your plan or move to a new one, you can always make the necessary changes at that point. If you use a feature rich online 401K tool then this should not take much time or effort. If you haven’t signed up for such a tool yet, take a look at http://401k-network.com, where you will find a comprehensive directory of various 401k internet tools in the market.

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.

Efficient Management of Your SBO 401k

I run a business where I and my wife are the only employees with the eligibility to participate in a retirement plan. What kind of plan should I choose and how can I manage it efficiently with my time constraints? – Jonathan Lodge, New York

Businesses where the owner and spouse make the only eligible employees for a retirement plan can opt for SBO-401k plans. This is a government registered savings plan that helps you set aside a portion of your earnings for future needs. This plan is tax deferred, which means that the contributions that you make into the plan are not taxed at the time when you make them. At withdrawal time, taxes do apply on the amounts that you take out from the plan. The SBO-401k plan is especially designed for small businesses with limited employees.

Your SBO-401k plan can be self directed, that is, you set up and manage it on your own; or it can be managed by a third party institution. There are several financial institutions that set up and manage 401ks on behalf of small businesses. Your bank may be a good first stop for you, if you want to have your 401k plan professionally managed. Other than banks; mutual funds, insurance companies and others also carry out these 401k related activities.

However, for a business like yours where only you and your spouse are the eligible contributors, it is quite unnecessary for you to opt for professional management. Simply choose an online 401K setup and management service like 401k Easy Online (http://401k-easy-online.com/) and you will find that making, tracking and managing contributions takes just a few minutes on a monthly basis.

Many small business owners are increasingly opting for such deals because of the complete control they get over their 401k plan. Such 401k suites make it easy for you to track your plan right from your desk at office. You can contribute to and manage your plan efficiently despite any time constraints that you may have.

SBO 401K for Partnership Businesses: Easy Method of Making Retirement Contributions

I run a small business partnership with two others. Am I limited to the SIMPLE IRA for retirement planning or is there any 401k plan that I can go for?Chris Epperson, Arkansas

A SIMPLE IRA is a good retirement plan for your business if you have employees who meet eligibility requirements that you have set for your company sponsored retirement plans. For example, consider that in addition to your business partners, you also have employees who are employed with your business for 5 years and are above 21 years of age. Then you have to make the retirement plan available to them as well.

If your business does not employ any more people other than yourself and your partners, then you have yet another option open to you- the SBO 401k. The SBO 401k or Small Business Owner 401K is a retirement plan especially designed for business owners like you who do not have other employees who qualify for the plan. You and your partners are considered business owners for the purpose of the plan, irrespective of the terms of your partnership.

You can make contributions from your salary to this 401k plan as well as opt for a profit sharing contribution. That is, a part of the salary you draw from your business in your capacity as partner is deposited into the account. In addition, a predetermined portion of the profits is also added in lieu of the ‘employer contribution’ that is made with regular 401ks.

The best part about SBO 401ks is that it is easy to set up the plan, administer it, and track the deposits and withdrawals you make from it. There are several options you can choose for online DIY SBO 401ks but make sure that you partner with a reliable provider like http://401keasy.com. The software that this site provides helps you manage the plan easily, conveniently and quickly. This package is adaptable and flexible too, allowing you to choose from a range of investment options to park your 401k funds in.

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.

Using Matching Contributions to Increase 401k Participation

How Do I Use Matching Contributions to Encourage My Employees to Participate in the 401k Program? – James W. Medlock, San Diego, CA

The best thing about 401ks is the fact that other than the contribution made by the employee for his future saving, he gets a little extra in the form of employer contributions. Advertising this fact to your employees can interest them into voluntarily making their own contributions to your small business 401k plan. After all, your employer contribution is based on what the employee contributes from his or her own salary.

Typically, most employers specify the percentage of the employee contribution that will be deposited into the 401k plan as matching contribution from the business. Some employers also opt to have a profit sharing contribution in addition to this. If you want to encourage employees who show promise or who put in extra effort for your business, a profit sharing contribution is a great way to do it. This is because this kind of matching contribution lets you use your discretion in rewarding employees. Many small businesses use this as a means to improve productivity and motivate promising employees to excel.

If you are hesitant to add a profit sharing feature to your 401k because this will give rise to complexities in managing the contributions made by you and your employee, you can leave these worries behind. All you have to do is choose a ready to deploy 401k management package like the one offered by http://401keasy.com. With this package you can set up the plan quickly and also administer it by spending just a few minutes a month.