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Thursday, 16 August 2007 |
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Borrowing from a 401k is one alternative to other loan options. Most Americans have the type of 401k that they can borrow against. The reason for borrowing should determine whether or not a loan is taken or if the participant can borrow from the account at all. There are also limits to how much a person can borrow. A 401k loan can be made for up to half the balance of the account or no more than $50,000. There can be many legitimate reasons for borrowing from a 401k account. The most common reasons are buying a home, paying bills and for emergencies like disability or major repairs.
Of the companies that do allow borrowing from 401k accounts, most have restrictions or rules on who can borrow and for what. Many people like borrowing from a 401k because they can access the money quickly. Also, there are no credit applications to fill out and most 401k loans offer low interest rates. Comparing 401k rates to other interest loans is an important detail. The interest paid to the account is usually lower than withdrawal of the money. However, withdrawal of funds is only an option for participants who are 59 and a half years of age or older. Yet another advantage of borrowing from your 401k versus other loans is the length of time most people are allowed to pay it back. For those buying a first home, the repayment period can be up to ten years. Five years is the average payback period for non home buying loans. There are disadvantages for borrowing from a 401k brings. The most obvious is that the money withdrawn will no longer earn interest. Also, if the borrower loses their job, the loan could come due in full within months. Borrowing from a 401k, or any retirement account, can be a viable option. There are many things to consider before borrowing from the account; most important is if it’s the least expensive option. Experts differ in opinion on whether borrowing from a 401k is most advantageous, but most agree on one thing. If an individual has any better options before borrowing from 401k account, they should take them. |
Written by Abdul Sumar on 2008-03-02 23:47:51
You should borrow from your 401k in the most extreme circumstances when you have no other source of financing, otherwise you will really be ruining your retirement plans.
Every monthly contribution that you miss also misses the growth & appreciation that is available from the stock markets, bond markets as well as commodities futures markets. Furthermore, you are also missing the power of compounding interest on your total principal balance. The low interest payments that you are paying to yourself is likely to be insignificant compared to the appreciation & returns on investment that is available in stocks/bonds/commodities markets. Also, the money you are paying yourself will be after-tax. For every $1 you earn, your ability to repay the loan will only be $0.78 (considering you are in the 22% tax bracket). Also, that $0.78 that you have to repay yourself will be taxed AGAIN when you retire and withdraw your money from your 401k. You are pretty much getting beat down by the double taxation & losing the power of compounding interest. Source www.401klookup.com | Written by vvhbrgnz on 2008-04-17 17:27:27
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