Most 401(k) loans come with interest rates cheaper than credit cards charge. You pay interest on the loan to yourself, not to a bank or other lender. Disadvantages: To borrow money, you remove it from investment in the market, forfeiting potential gains.
Not all employers permit loans from their plan. There's a limit on how much you can borrow. You may lose investment gains from the money you withdrew. You might feel tethered to your employer for longer than you want.
When done for the right reasons, taking a short-term 401(k) loan and paying it back on schedule isn't necessarily a bad idea. Reasons to borrow from your 401(k) include speed and convenience, repayment flexibility, cost advantage, and potential benefits to your retirement savings in a down market.
A loan lets you borrow money from your retirement savings and pay it back to yourself over time, with interest—the loan payments and interest go back into your account. A withdrawal permanently removes money from your retirement savings for your immediate use, but you'll have to pay extra taxes and possible penalties.
The Pros & Cons of 401k Withdrawals
The personal loan can be cheaper if you have excellent credit and don't need to borrow a lot of money. The 401(k) loan is a cheaper choice for people with bad credit as long as they pay the loan back without penalties.
The IRS allows penalty-free withdrawals from retirement accounts after age 59 ½ and requires withdrawals after age 72 (these are called Required Minimum Distributions, or RMDs). There are some exceptions to these rules for 401ks and other qualified plans. Try to think of your retirement savings accounts like a pension.
You have five years to pay back a 401k loan.
There is no early repayment penalty. Most plans allow you to repay the loan through payroll deductions, the same way you invested the money.
A 401(k) plan will usually allow you to borrow up to 50% of your vested balance, with a maximum loan amount of $50,000. ... On the other hand, if 50% of your vested account balance amounts to less than $10,000, your plan may include an exception and allow you borrow up to $10,000.
401(k) loans are not reported on your federal tax return unless you default on your loan, at which point it will become a “distribution” and be subject to the rules of early withdrawal. Distributions taken from your 401(k) before age 59 1/2 are taxed as ordinary income and subject to a 10% penalty for early withdrawal.
401(k) Loans Are Not Free Money
When you borrow money from your 401(k), you are taking out a loan. Just like an auto loan or a home loan, this means you promise to pay back what you borrow with interest.
Interest Rates
Like most loans (except maybe those from Mom and Dad), a 401(k) loan comes with interest. The rate is usually a point or two above the prime rate. Right now, the prime rate sits at 5.5%, so your 401(k) loan rate will come out between 6.5% and 7.5%.
With direct deposit, the transfer itself should take two to three days, but the loan still needs to be approved before the funds are released.
Yet No Comments