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Is it wise to borrow from your 401(k) plan?
Results so far:
| Yes | 25% | 39 votes | Total: 153 votes | |
| No | 75% | 114 votes |
Yes
by Anthony Megna
Created on: October 07, 2011 Last Updated: October 11, 2011
To borrow from your own 401 plan is essentially borrowing from yourself. So the question then becomes, should you make a loan to yourself? The answer is, of course! The fact is that the plan is invested either in stocks, bonds, or money market instruments, and usually a combination of the three. That means that the retirement income reflects how the economy is doing at any one point in time. So how does this affect making a loan to yourself?
An example of borrowing from your retirement plan is important in illustrating why it's okay to make the loan. Let's say that Tom wants to open up a business, but for some reason can't get a loan with reasonable rates. Tom is certainly not going to borrow from his credit cards, as first he doesn't have enough of a credit line, and second the monthly payment would cripple him. So his only other source is his retirement plan, as he's exhausted his efforts from friends and family. Tom has $100,000 in his 401k, and he needs $25,000 to begin his business. He realizes that he needs to pay back the loan, and since he still is lucky enough to have a full time job, he doesn't think this should be a problem. So he makes the loan to himself.
The business he starts is a part-time business, and one in which the money he borrows is going to pay for the tools necessary to begin. The business happens to be a vending machine business, and one in which he can do for a total of about twenty hours per week. Why shouldn't he borrow from his retirement plan to open his business? Tom feels secure that he can gross around two thousand dollars per month with the business, and he already has his customers lined up. With the money he makes from his business, he can pay off the loan amount and he figures that he'll have the loan payed off within five years.
Of course, every business is a risk, but nothing ventured, nothing gained is his motto. Tom needs to have another source of retirement income, and relying upon his company that he works for is just as risky as starting a business. His co-workers don't feel safe at the company, in fact nobody does! If for some reason Tom gets eliminated from his full time job, he will have the option to expand his part time business, so Tom jumps in with both feet secure in the knowledge that he's done his homework, and feels relatively comfortable that making the leap into his own business is the smartest thing he can do right now to protect his future.
The above is just one example of why it is a good idea to borrow from your own retirement plan. After all, isn't the retirement plan gambling on how the economy is not only doing currently, but in the future as well? Tom feels he'd rather gamble on himself and his efforts.
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No
by Angela Diggs
Created on: September 06, 2008 Last Updated: March 25, 2009
Borrowing from your 401(K) should be a last resort and used only for emergencies. Other than that, it is not a wise choice to take from your 401(K) plan.
The purpose of it is to save for your retirement. If you borrow against it you will be risking your future. This should be the last resort if you need money. Why? There many tax penalties for withdrawing money before the age of 59.5. If you are over 55 and under 59.5, you will suffer a 10% penalty on the money you've taken. In addition to that, you will be charged income tax because they government will count what you take as income. It will have to be paid back as soon as possible. If you ask me, this is stress you do not need. You will lose more than you gain if you borrow from your 401(K) plan.
The 401(K) plan is a form of employer sponsored defined contribution retirement plan under section 401(K) of the Internal Revenue System (26 U.S.C. 401(k)) in the United States and some other republics. This plan permits an employee to conserve for retirement while postponing income taxes on the saved money and revenue until withdrawal. The employee designates to have a percentage of his or her remuneration paid directly or rescheduled into his or her 401(K) account. The operative can choose from several investment possibilities, most likely a mixture of mutual finds that highlight stocks, bonds, money market capital spending, or a combination of each. Numerous establishments' 401(K) plans also recommend the alternative to acquire the business's stock. The worker can commonly re-apportion money among these investment choices at any time. When it comes to the trustee-directed 401(K) plans, the organization assigns executors who decide how the plan's assets will be invested.
It is a fact that most employers apply serious limitations on extractions while a person remains employed with the organization and is under the age of 59.5. Any extraction that is allowed before this age is vulnerable to an excise tax to twenty percent of the aggregate disseminated, including withdrawals to compensate expenditures pertaining to adversity, except to the extent of allotment does not transcend the amount allowable as a deduction under the Internal Revenue Code section 213 to the worker for amounts compensated during the taxable year for medical care.
Don't get me wrong, there are options. Numerous plans allow employs to take loans from their 401 (K) to be indemnified with after-tax funds at pre defined interest rates. The interest profits then become part of the 401(K) balance. The loan itself is not taxable income nor is it subject to the ten percent penalty as long as it is paid back in agreement with section 72(p) of the Internal Revenue Code.
It is a better option to leave your 401(K) alone until you reach retirement age. Allow your money to work as hard for you as you have worked for it. It does not pay to draw funds you can not afford to repay or go without. Look for other option that will not cost you your time.
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