401k Loans

You might want to consider 401k loans if you need a large sum of money as soon as possible. If you have the money you need in a 401k retirement investment account, there is a way to access it without the early withdrawal penalties and taxes. Most retirement investment plans will allow you to take loans, and there are several good reasons to consider this option.

First, getting loans from 401k account is a good, low cost alternative to early withdrawal from your 401k account. Early withdrawal is rarely a good option. Taking money out of a 401k retirement account before you turn 59 and one half years of age usually will force you to pay ten percent of your money in early withdrawal penalties as well as ten percent in taxes. That makes a total of one fifth of both your principal and your earnings. You will also have to pay income tax on any earnings your account made while it was tax deferred. Altogether, this is one hefty tax bill. Taking loans from 401k account can save you from having to lose around half of your hard earned dividends.

Another way that 401k loans can be a good decision is that they allow you to pay interest to your 401k account. This means that the money that would have gone to a faceless bank can instead sit in your retirement account collecting dividends for your retirement. If you find yourself in a situation where you have to take a loan and pay interest, why not pay that interest to your future self?

The government puts no limits or contingencies on borrowing money from your 401k retirement plan, but your employer or plan administrator may. Some employers or plans only allow this on a case by case basis, considering each set of circumstances in its own right. Others allow loans in one of a set list of circumstances which usually includes to pay education related expenses for yourself, spouse, or child, to prevent eviction from your home, to pay un-reimbursed medical expenses, or to buy a first-time residence. You may be asked to sign a paper merely stating that you have a situation which places you in need of a loan. The loan usually must be paid back in five years or less, although this can be extended by house related loans. Whatever the red tape involved, 401k loans are usually worth the effort.