Securing an Insecure Circumstance with 401K Loans – Good or Bad Move?

Facing an unavoidable crisis situation? Has it caused a drain on your money and all the other available resources at disposal? You might consider resorting to the 401k plan. This loan gives employees the option of borrowing money from their retirement savings. An effortless access to retirement funds is what this loan plan guarantees.

Some companies give the employees the perk of taking the 401k loans. This is a measure through which the government of the United States secures the senior years of employees. But before borrowing from their 401k plan, employees must first of all evaluate all facts concerning this plan.

401K Loan Facts:

Most people do not have a major misunderstanding about how the loan works. The 401k plan mostly allows you to borrow up to 50% of your account balance or 50, 000 dollars, whichever stands less. In general you are allowed to borrow one half of your retirement plan balance. Once you have accepted the loan, you require to start paying the loan back during your next pay period. Usually an automatic deduction is made from your paycheck.

Loan Length Requirement

If you are not using the money to purchase a house, you must pay the money back within 5 years or less. Only if you buy a residential property can your repayment period be extended. But this also increases the termination risks.

Advantages of 401k Loans

  • You need not require having credit cards to qualify for this loan. This loan does not cast an impact on your credit ratings either. In short, this loan has nothing to do with your credit cards.
  • It does not involve complexities in your procedure of withdrawal. Incase you require money for emergency or any other compelling reason; you can simply withdraw money from your retirement balance and pay it back. The transaction is also made within a week or two which is faster than most of the loan options.
  • The interest rate that it involves is generally low. You are also paying the amount back to yourself because it is both the payment and the interest that goes to your 401k account.
  • The loans do not charge any application fees. If charged, they are kept as low as possible.
  • You can avoid 10 % 401k early withdrawal penalty fees.

 Disadvantages of 401k Loans

  • The withdrawal of the money causes your retirement fund to stop flourishing till the loan is paid back.
  • In case you lose your job the entire amount of your loan must be paid back within 60 days. Even if you are unable to pay the loan, you are subject to a premature 401k distribution. One must therefore be well informed on the termination risks before borrowing the loan.
  • Another disadvantage of borrowing the loan is the negative impact of taxation on your money. The post tax dollars taxation repayment can make the matter worse. It gets worse when the loan is taken when one has already retired. This is because they pay double tax on the same money.
  • Since you have to repay the loan through payroll deductions, you get a smaller paycheck.
  • If you lose everything in a mishap and face the need to declare bankruptcy, you can easily rely upon your retirement plan asset like 401k. This is a safe refuge that creditors have a tough time touching. So, if you start drawing money from this account, you will be losing out this valuable treasure.

Keeping the advantages and disadvantages in mind you need to take the decision of whether you can handle the terms of this loan. If you are certain that your job is stable and you are fine with a smaller paycheck and reduced retirement savings, you can take this loan. Though this loan comes with its negative attributes yet we are often forced to face certain unavoidable situations in our life that compel us to consider the options that we have at our disposal.

In today’s’ economy, taking a 401k loan interests many and it can be a great instrument for ones who are able and disciplined enough to repay the loan on time. Like all your financial decisions, you must not take the decision of opting for a 401k loan in haste and consult your financial planner before making the major call.

About the Author: Alicia Johnson is an outreach consultant in Fusion BPO Services – a leading call center services provider. She has years of experience in the financial sector. It is through her articles that you will be able to solve your financial queries and discover the various happenings in the concerned sector.