Learning All About 401(K) Loan Before Getting One

There are many loan options when you found yourself in a difficult financial situation. You can apply for an online Cash Advance, or take advantage of existing financial programs. And this includes the 401(K) loan.

The only reason for a 401(k) is to save for your future. We all imagine the day that we won’t have to work and we can do all the things we couldn’t do in the 40-something years we’ve worked. But with the economy in the dumps, many people are tapping into their 401(k)’s earlier than allowed. Some are doing it for the extra cash and some are doing it to pay the bills. Rather than pay the withdrawal penalties, some employers allow its employees to take a 401(k) loan.

401(k) loans are often easy to access, but now there is another way to access it. Earlier this year, there was information about a Visa debit card that was connected to their 401(k) plan and would be considered a loan. It would allow people to withdraw from an ATM or spend it at any merchant.

Experts feel that this is highly detrimental to 401(k) accounts and their holder’s futures. Many people aren’t disciplined enough to use a readily available debit card in only emergencies. They feel that this is just a greedy lending practice on behalf of the 401(k) companies. Some other experts believe that since these are tough times for people and a debit card option can be more attractive.

So what is a 401(k) loan exactly? It allows you to borrow against your own retirement and make the payments back to yourself, with interest. The interest is often much lower than those found in banks or credit unions and usually at the prime rate (possibly a percentage point higher). Most employers give you the option to repay the loan within 60 months and will deduct the payments through your paycheck. Federal rules allow you borrow up to 50% of your vested balance or up to a maximum of $50,000.

This may sound like a great option, but a 401(k) loan isn’t always the best option. If you leave your employer, you are required to pay the loan back in full. The period for repayment is often difficult for employees, as it usually must be repaid within couple of months of leaving the company. If you don’t, it will be considered a 401(k) withdrawal, and you’ll have to pay income taxes and penalties on the remaining balance. Even if you stay with the company and make all your payments, it doesn’t dispute the fact that you’ve lost investment earnings. The money that was borrowed is no longer growing; therefore you will have less money when you retire.

If you must take a 401(k) loan, be sure you are you sure that you have an actual need for the money. If you put it towards something like a college degree, it makes better sense than purchasing a new computer. You should also be sure that you haven’t exhausted all other borrowing vehicles. You can check to see if there is a home equity loan available or one through a family member (if you’re comfortable).

Finally, if you decide it’s your only option, be sure you don’t borrow more than you can afford. If you have to stop 401(k) contributions because of your loan payments, then you’re taking out too much. A 401(k) loan is bad enough; you shouldn’t do more damage by stopping contributions to your future.