Does Your 401k Offer Loans?

If you need to access your retirement money, 401k loans can be a useful. Some 401k plans offer these loans to those that have a 401k for a certain period of time. Here are the basics of 401k loans and why they might be beneficial to you.

401k Loans

If your retirement account offers this option, you might want to consider borrowing money from this before other options. With this system, you will be able to gain access to your money and set up a repayment program over a period of time. For example, you might have five years to repay the loan to your retirement account. The plan might require that you pay in interest the rate of the prime rate plus 1 percent. 

Avoiding Penalties

Typically, whenever you make a withdrawal from a retirement account before the age of 59 1/2, you will face a 10 percent early distribution penalty. In addition to this, you will have to pay income taxes on the money that you receive. With a 401k loan, you will not have to worry about any of this. You can access the money, and there will be no early distribution penalties assessed. You will also not have to pay any taxes on the money that you borrow.

Simple Processing

Getting this type of loan is also very simple compared to acquiring other types of loans. If your plan allows loans, then you should be able to get one. Most of the time, there will be no credit checks or income verification. You will simply have to fill out a form in order to request the loan. The provider will then process the request and issue a check for the amount of money that you need. There might be restrictions that you can borrow only a certain amount of money based upon how large your account is. However, they will usually process the loan very quickly and get you the money that you need.

Paying Yourself

Another advantage of this type of loan is that, as a borrower, you are paying yourself back. It is much easier to pay yourself a certain percentage of interest than it is to pay someone else. With each payment that you make, you know that you are helping to fund your retirement. Therefore, many people like using this option as opposed to working with a traditional lender.

Failure to Pay

Whenever you get this type of loan, you will want to make sure that you understand the payment requirements. You will have to stick to a regular payment schedule that is determined by the provider. If you fail to make your payments, the provider will have to take further action. At a certain point, the IRS is going to treat this loan as an early distribution. You will then have to pay your 10 percent early distribution penalty and start paying income taxes on the money.

blog comments powered by Disqus