401k Loan Tax
Know about the 401k loan taxand what you can expect to pay before you decide to follow through with it. Like so many other topics, whether or not it’s a good idea to borrow against your 401k comes with conflicting advice. That’s why this page will explore the question, the so-called 401k loan tax, and what your options are when you feel as though you need to borrow money from your retirement account.
Borrowing Against Your Retirement Fund
In a perfect world, everyone would be able to save money for emergencies, unexpected expenses, and the like. When something comes up and you don’t have an emergency fund to fall back on, however, the money in your retirement account might be one of the few options. With that in mind, if you find yourself having to take money from your 401k, it helps to know just what you are getting into. The most important rule you need to keep in mind is that there is a financial penalty for withdrawing money. This isn’t exactly like an early withdrawal where a percentage of what you take out is paid. Instead, since it’s a loan, it needs to be repaid and this typically starts the next pay period. Likewise, as the IRS website points out, 401k loans can only be so large; either $50,000 or half of the available account balance, whichever is less. The full balance of the loan must be repaid in 5 years, unless it was used to purchase a home. Having that basic knowledge is a good starting point when determining whether or not borrowing from your 401k is something you want to do. Having said that, let’s look at some considerations that you need to keep in mind:
- Your Money Won’t Be Growing – Every dollar withdrawn is a dollar that won’t be growing on the stock market or in bonds. As a result, your account as a whole won’t be thriving the way it should.
- It Has to Be Repaid in Full If You Leave the Job – If you’re going to borrow from your company’s 401k plan, make sure you plan on sticking around for a while. The term “401k loan tax” is applicable in the sense that the money you borrowed will be considered a taxable distribution if you leave the job and haven’t paid back the balance. This means you lose out on even more money.
- Make Sure It Goes Toward Something Worthwhile – Not all reasons for taking out a loan are equal. New television might not be worth the hassle, but something like putting a down payment on a house or pursuing a professional certification most definitely are. If you’re considering a 401k loan, give some serious thought to what it’s going to be used for before you move forward with it.
- You Might Not Be Able to Contribute While the Loan Still Stands – This depends on the plan, but you might not be able to contribute to your plan until the loan is paid. This will effectively stall any plans you had for saving.
In short, you want to learn all about the terms of your company’s 401k plan before you commit to taking out a loan. Being informed about any potential 401k loan tax and what you can expect is part of being an informed investor. When you’re an informed investor, you have that much more control over your financial future. If you have any further questions, please don’t hesitate to take a look around the rest of the site for answers to questions that you might have to investing. Go Back To the Invest Your Money Now HOMEPAGE