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401(k) loan

Considering the high-interest rates that apply to many credit cards and other types of consumer loans, is it a good idea to take a 401(k) loan instead? It often depends on your job security and how you intend to use the money.

About 87% of participants are in 401(k) plan that offers a 401(k) loan. But just because you can get a loan doesn’t mean you should.

Taking a 401(k) loan

Know the rules. Under IRS rules, you can borrow the lesser of $50,000 or 50% of the vested account balance. 401(k)Loans must be repaid within five years (longer terms may be allowed for a home purchase). However, each plan is allowed to set its interest rates and repayment policies. Even though the plan will charge interest, the happy news is that the interest returns to your account.

Understand the risks. Borrowed money isn’t pursuing investment returns, which could result in a retirement income shortfall. Also, if you leave your employer, the loan generally must be repaid within 60 to 90 days. The outstanding balance may be a distribution if you fail to repay on time. Distributions from employer-sponsored retirement plans are subject to ordinary income tax. Early withdrawals taken before age 59½ may also incur a 10% federal income tax penalty.

Taking out a 401(k) loan could be a better option than carrying high-interest debt. But as always, you should be careful to avoid borrowing to maintain a lifestyle you cannot afford. Learn more about how to manage your 401(k) account.

Retirement Planning That Includes Your 401(k) Plans

If you have multiple 401(k) accounts from different employment locations, we can consolidate them into one account.  It’s far easier for you to manage. Moreover, I can advise you on how to create a retirement you can never outlive.
Let’s meet for a FREE retirement strategy consultation at my office.
Contact me  (866) 471-7233.

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