Loans agsainst 401k
Often we keep hearing about the 401K plan but it would be surprising to know that there are quite a few people who are unaware of what is the 401K plan. Well 401K plan is a retirement plan which is funded by the employer. The plan is called as the 401K plan named after the US Internal Revenue Code. These plans offer the advantage of saving money without paying the income tax on the money that is given towards the 401K plans. It is the sole responsibility of the employee to decide as to how to use the money that is saved in the 401K plans.
Usually the money from the 401K plans can be withdrawn only at the time of retirement but it can also be withdrawn under special conditions like complete disability. In case the money is withdrawn because of any other reason then the person would have to pay a penalty of 10% and would have to pay the normal income tax. But there are a number of programs that allow people to borrow money against the 401K-retirement plan. Usually most of the loan programs would allow people to use the 401K funds as security against which they can borrow money. People are allowed to borrow huge amounts of money against this plan.
Loans against 401K plan, can be used for various purposes like:
• Buying a house
• Sponsoring a wedding
• Education expenses of children
• Debt consolidation
• Meeting medical expenses
The interest rates charged for loans against 401K plan, are lower as compared to the other loans and the interest rate that is paid towards these loans is endorsed to the 401K account. This gives you an advantage that if you were paying more interest rate as compared to the return then you would be funding more towards
the 401K accounts. When you take loans against 401K then this is not reflected in your credit report. This would mean that even if you default on the loan it would not appear on your credit report.
You are also required to be careful with the loans against 401K because if you change your job or if you are sacked from your job the whole amount of loan becomes due immediately. Usually you would get a time limit of 2 months to pay back the loan amount after losing or leaving the job but there can be instances that the employer would demand that the amount be paid back within a month. If you were unable to pay back the amount in the specified period then you would be labeled as a defaulter. Besides this if you are under the retirement age i.e. 59 years then you are required to pay the penalty of 10% and also the normal income tax on the amount accumulated in the 401K-retirement plan. But there are times when the money can be transferred to your new 401K accounts with the new employer or to a personal retirement account.
The payments for the loans against 401K are deducted from the salary and your salary would become less. With the help of loans against 401K you can take an amount up to as much as 50% of the amount that is accumulated in your 401K retirement plan. But if you have previously borrowed money against the 401K plans in the past 1-year then you are entitled for a lower amount. The repayment period for these loans is usually up to 5 years and you are required to make the payments on a quarterly basis. But if you are using the loan against 401K plan to buy a house then your repayment period would vary up to 30 years. The interest that you pay towards the loans against 401K are tax deductible and moreover the interest is paid towards your 401K retirement plan.
There are a number of advantages that you can have with the help of loans against 401K. Some of these advantages include:
• There is no credit check required when borrowing loans against 401K because of the fact that the person is borrowing against his own money.
• There are not many restrictions when applying for loans against 401K usually all the applications are approved.
• The application process is simple and the loans are approved without many formalities.
• The loans are given out fast usually within a week of applying.
• The interest rate paid towards these loans is tax deductible.
The 401K-retirement plan is something that is considered as the savings for retirement. So when you decide to take a loan against 401K you should consider other options also. The loans against 401K should be used only if there is no other option left for the applicant. There are a number of financial aspects related to the loans against 401K. It is advised that you consult a financial expert before you take these loans. These loans are to be paid back within a specified duration of time and hence you should be careful about the payments because if you default then the whole amount would be due immediately and you would also have to pay the 10% penalty if you have borrowed the money before retirement.
You should consider taking loans against 401K only if you are not planning to change your job in the near future. These loans should be taken only when there is an emergency and there is no other way in which you can borrow money.
Other articles
