Borrowing From Your 401(k)?

It’s not an ideal situation, but are you considering borrowing from your 401(k)? I have some clients who need funds now, and have plenty of money stored away for retirement, so they are considering tapping into their 401(k) account.

Image of a justice scale with the words 401(k) on one side and loan is on the other side of the scale.
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June 24th, 2018
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It’s not an ideal situation, but are you considering borrowing from your 401(k)? I have some clients who need funds now, and have plenty of money stored away for retirement, so they are considering tapping into their 401(k) account.

Before you withdraw money from your retirement savings, there are some things you should know about borrowing from your 401(k):

  • HOW MUCH CAN I BORROW – If you can’t get a traditional loan from a bank or creditor and need cash, you can borrow from your 401(k). If you participate in a 401(k) plan, you can borrow up to $50,000 or half of the balance of the plan, whichever is less.
  • HOW MUCH IS THE INTEREST – The good news is that if you take a loan from your 401(k), interest rates can be pretty reasonable, maybe even half as much as on a personal loan. This might be a good strategy for you if your cash flow is low and you currently have high interest rates on monthly payments.
  • PAYING IT BACK – After you take out a loan, take into consideration that there is a chance that if you’re fired from your job or if your company goes under that you will have to pay back the entire balance of the 401(k) loan within 60 days. Whatever you don’t repay is labeled as a retirement distribution, which could result in income tax and even a 10 percent early withdrawal period if you’re under the age of 59 ½.
  • SEEK ALTERNATIVE FINANCING – Before you dip into your 401(k) plan, have you considered taking out a home equity loan or making a taxable withdrawal from your 401(k)? These strategies allow you to avoid the 10 percent early withdrawal penalty if you’re under the age of 59 ½. Ask your accountant or bookkeeper which option would work best for you.

Financial setbacks happen to everyone. Make sure you contact your bookkeeper or accountant before you take out a 401(k) loan. At Brigade Bookkeeping, we look for future financial pitfalls for our clients and help them avoid them. Your accountant or bookkeeper should be doing the same for you. If not, contact our team at Brigade Bookkeeping and we’ll set you on the right path towards retirement and a more secure financial future.

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