The Loan Benefits 401k Plans Provide
- Posted by admin on September 27th, 2009 filed in Business and Management
The benefits 401k accounts offer are plenty, but namely they provide a sense of security for the future. There is no real guarantee that social security will be able to provide taxpayers with enough income in order to live comfortably during their golden years. In fact, it is a very real possibility that social security may not even exist in the next ten years. With this in mind, and the fact that there are some strong tax incentives, as well as employer contributions to consider with regards to a 401k investment, it is best to get started saving right away.
Although the benefits that a 401k plan offers are plenty, these are retirement plans, and the expectation is that no money is taken out until you reach retirement age (fifty-nine and a half is when you can start making withdrawals without penalty). There are, however, occasions in your life when you may run into financial difficulties and the only source of income you may have is your 401k savings. You can always take money out of your account but then you will have to pay the ten percent penalty, as well as tax on the amount that is taken out. Another option that may be available is to borrow from your 401k retirement plan and then pay it back.
Loans are not part of the benefits 401k plans offer. Whether you are able to obtain a loan, and any other restrictions will largely depend on how your plan has been set up through your employer. In most cases, a 401k loan will be limited to hardship considerations, meaning that you would need to show how you would likely be placed in a bad situation financially if you cannot get a loan. The recent collapse of the housing market is a good example of people who were unable to make mortgage payments on their property and without a loan would lose what they owned.
The amount you borrow may be restricted to half the funds in your account, or a maximum of $50,000. You will then need to repay the loan, following whatever guidelines are in place for your particular 401k pension account. Usually, you have about five years to repay the loan, making quarterly or monthly payments on a regular basis. It is very important that you follow the rules for repayment closely. If you do not, there is a strong chance that the IRS will consider the loan ordinary income, meaning you could be forced to pay tax on the amount you borrowed, as well as the ten percent penalty charge for early withdrawal.
There are many benefits 401k plans offer and the chance to borrow money from your 401k is just another way of having more control over your finances. It is impossible to predict what will happen in our lives, like running into financial difficulties, yet having a significant amount of money available that you cannot touch makes little sense. Therefore, there are loan opportunities through your 401k savings. Just make sure you pay back the loan to avoid any extra costs or loss of money.
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