You And Your 401k Loan

Article Written By: RebbecaMyers

For some people, their 401 can be very confusing and cause them to be involved with some guesswork about what to do. You may even have questions about your own 401 limits and guidelines. The following information may be helpful to you if you're considering or planning on borrowing from your own retirement funds.

Usually you have to pay the loan money back in a period of about five years, sometimes less. However, if you plan on using your loan to purchase a house, the length of your loan period may be extended. But how much are you allowed to borrow? For most, you can borrow at least half of your retirement plan's balance in the bank, or around a little less than $50,000. Loan payments are usually processed from a removal of funds, or automatic deduction from your paycheck at work.

With a 401k Loan, you will always pay a consistent interest rate, comparable to that of a consumer loan. But the money is not lost to a bank or other source with repayment - you are simply putting it back into your account at your bank. Because you're not borrowing from a bank or other source, you will find that when you apply for a 401k Loan, you won't have your credit checked, which can be a sign of relief for many people.

You won't be denied a 401k Loan because you are technically temporarily borrowing funds from yourself - via your own retirement funds for the future.

However, for the most part, the use of a Loan on retirement funds for money should only be considered in a legitimate emergency in which you truly need funds. The reason for this is that the use of your 401k Loan for other projects can result in some noteworthy negative impacts as well. The first being that when you do decide to start paying back into your loan, you will be doing this with your own money after taxes. The money that you borrow from that loan will also forfeit a lot of your potential interest from previous investments, because the money is no longer present in your account.

But there's more. In consideration of the current economy - let's say that you lose your job or you are temporarily put out of work. Anyone who isn't working with their employer and has borrowed from their 401k Loan has a problem, because at that point, your loan instantly becomes due within the next 60 days of your unemployment. For people who cannot return that money in the time period, the amount then is considered to be subject to taxes: state income tax, federal income tax, and plenty of penalties.

Now that you know the facts about your 401k Loan, think carefully before you borrow into it. After all, you're borrowing into your own future.

About the Author

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This Article Has Been Published on Thu, 19 Nov 2009 and Read 602 Times

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