Better Alternatives for 401 (K) Loans

March 30, 2019 by No Comments

 

With more than 80% of full-time employees who have access to a 401 (k), they are easily one of the most popular retirement planning options. By allowing you to deposit money for pre-tax retirement, 401 (k) plans often offer free money through an employer competition. It is logical that you want to protect these funds as much as possible. A loan of 401 (k) offers those who need money the ability to borrow against their future. Fidelity Investments reports that 11% of employees took out a 401 (k) loan in 2013 – an average of $ 9,500. For those who need money, a loan of 401 (k) seems a justified option. In most cases this is not the case. In many cases there are other alternatives to consider.

 

Borrow against your future

 

Borrow against your future

If you need money, it’s easy to see your 401 (k) as an option to take care of the need. The money is just there, hopefully growing, and it’s yours. Don’t be guilty of this short-term vision. A 401 (k) is an important part of your overall retirement planning strategy. It is not a piggy bank to plunder. According to Elle Kaplan, CEO of Lexion Capital, “many make the mistake of believing that this is a” free loan “while actually borrowing for their future.” Kaplan raises an important consideration that is often overlooked in discussions about 401 (k) loans that you borrow against your future, this can be a mr. and Mrs. Have an antrobus-rich impact on future planning needs if it is done too much or is not reimbursed. (For more information, see: 401 (k) Planning: How much should you save? <)

The aforementioned Fidelity study indicates that 40% of those who borrow from their 401 (k) also reduce their savings rate after a loan. 401 (k) as a lifeboat Consider what it really is – a tool to save for your future. Instead of attacking that future, you start saving money outside of the plan for your short, medium and long term needs. save for retirement and have access to funds in times of need.

 

Tax implications

 

Tax implications

There are many tax benefits that contribute to a 4 01 (k). The most important among them is the fact that the contributions come on a pre-tax basis. Taking out a 401 (k) loan opens for a wide range of tax implications such as: (See for more:

Borrow from your pension plan .) You will not receive a tax break on the funds that repay the loan.

  • If you change jobs or are fired, the loan can be considered an income if it is not repaid within 60 days.
  • The second point is important to remember, even in the event of a job loss due to company takeover. According to Robert Farrington, founder of The College Investor, “If you are an employee of a company being acquired, your 401 (k) plan ends and you are asked to participate in the 401 (k) plan of the new However, if you have an outstanding loan with your old employer, it must be repaid at the end of the acquisition deal. “This can lead to a nasty surprise if your business is sold out. (See for more:

401 (k) Loans pros and cons .) Moreover, many do not realize that you have to make payments on your 401 (k) loan – otherwise you will have a tax hit. Kaplan adds: “If you do not make a payment for 90 days, that money is considered a benefit and it is taxed as income, plus a fine of 10% if you are younger than 59 ½ years old.” to point out that there are ways to avoid a 10% fine, for example if you are disabled, although a loan should still be considered as a last resort.

Possible alternatives

Although the IRS allows you to borrow up to $ 50,000 from a 401 (k), this does not mean that you should do that. There are other options to consider when you need access to money for a large payout. According to Steve Lewit, CEO of United Advisors, “First on the list should be home equity; internet-based financing; family; spending reduction; borrowing of life insurance policies at cash value; selling other investments; then, and only then, if none of them work, the 401 (k). “It is important to know that each of these options has their respective risks and benefits, although few of them represent the same risk as a 401 (k) ) loan. The options available may not be desirable, but in most cases they will serve you much better. (For more information, see:

Do you have to borrow from your pension plan? 

A 401 (k) loan may seem like a good option if you need access to money. In almost all cases that is simply not true. If you are in financial need, research other available options and leave your 401 (k) alone to grow.