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Like to take a loan from my 401K but not allowed. What are my options?

Hi,

Unfortunately, I'm currently unemployed and now need of cash to pay the family bills. I would preferably like to take a loan out on my 401K instead of cashing out the 401K(don't want to pay penalties if I can avoid it.) Since I'm no longer an employee, my 401K plan does not allow me to take a loan. Either I can cash out my 401K or roll over to another IRA account. I'm unsure if I do roll over, what are the cost implications(pros vs cons) of employer sponsored plan(MyBenefits via Fidelity) vs. my own IRA(Fidelity or otherwise.)

Appreciate if you can shed some light by providing some salient points I should consider with my current dilemma?

Jul 29, 2014 by GJ from Manhattan, NY in  |  Flag
4 Answers  |  6 Followers
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1 vote

Your options are limited. If you absolutely have to use the money to live on, have no other sources to use first - you'll have to take money from your 401(k).

If you withdraw directly from the 401(k), they will automatically withhold 20% Fed Tax and any penalty if you're under age 55. That's one advantage of taking directly from the 401(k) - the ability to take non-penalized distributions at age 55 vs age 59.5 in an IRA.

If you roll it to an IRA and then take distributions there will not automatically be taxes and penalties withheld, but you will still be responsible for them when you file. And you have to be age 59.5 or more to not have additional penalties.

There are certain types of hardship withdrawals that may avoid early withdrawal penalties.

2 Comments   |  Flag   |  Jul 29, 2014 from Canton, GA
David Wayne

GOOD DAY
I'm David, i am from Delaware State, 7 DICKERSON ST HARRINGTON, DE 19952-1302
I AM ON THIS SITE TO SHARE BRIEFLY HOW I WAS HELPED AND WAS ABLE TO GET A LOAN THAT I HAVE BEEN BIDDING FOR, OVER A LONG TIME NOW. I APPLIED FOR A LOAN IN " HALIFAX " AND I GOT MY LOAN FROM THEM. WITH A LOW COST OF INSURANCE, AND I GOT MY LOAN AT 4.50%. ARE YOU LOOKING FOR A LOAN FOR ANY PROJECT? CONTACT HALIFAX BANK PLC FOR A STRESS FREE AND FAST LOAN.
THANK YOU, AND I WISH YOU GOOD LUCK IN ALL YOUR ENDEAVORS.

CONTACT EMAIL: halifax_ivandepartment@yahoo.com

Flag |  May 30, 2017
Mike

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Flag |  Dec 16, 2019

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1 vote

I'm assuming you have not other funds available - emergency cash accounts, other non-tax-advantaged investment accounts, or even a Roth IRA (contributions can be taken out without penalty). If this is the case then there are a few circumstances that will allow for a withdrawal from a Traditional IRA (BUT NOT TAX FREE). Those are medical bills, disability, paying health insurance premiums, and, of course, if you owe the IRS. There are some other rules with doing this if you go down this path. Here is a good article...http://www.bankrate.com/finance/retirement/penalty-free-401-k-ira-withdrawals-2.aspx. Just a thought, you could do a rollover to a Roth IRA, pay the taxes, and then take out your contributions without penalty. I would have to look into this a bit more to make sure there are no issues with doing this. Maybe someone else on Brightscope can help me out on this one.

Also, in general it is a good idea to move money from an employer sponsored plan if you no longer work for the company. You have a much wider selection of investment options and can probably save on fees (expense ratios).

1 Comment   |  Flag   |  Jul 29, 2014 from Minneapolis, MN
David Wayne

GOOD DAY
I'm David, i am from Delaware State, 7 DICKERSON ST HARRINGTON, DE 19952-1302
I AM ON THIS SITE TO SHARE BRIEFLY HOW I WAS HELPED AND WAS ABLE TO GET A LOAN THAT I HAVE BEEN BIDDING FOR, OVER A LONG TIME NOW. I APPLIED FOR A LOAN IN " HALIFAX " AND I GOT MY LOAN FROM THEM. WITH A LOW COST OF INSURANCE, AND I GOT MY LOAN AT 4.50%. ARE YOU LOOKING FOR A LOAN FOR ANY PROJECT? CONTACT HALIFAX BANK PLC FOR A STRESS FREE AND FAST LOAN.
THANK YOU, AND I WISH YOU GOOD LUCK IN ALL YOUR ENDEAVORS.

CONTACT EMAIL: halifax_ivandepartment@yahoo.com

Flag |  May 30, 2017

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1 vote

GJ,

As you noted, your options are limited. Here are some important considerations and a clarification on Phillip's previous comment.

Taxes:

Regardless of where you take distributions (401k or IRA), the distribution amount will be included in your income for federal and state tax calculations. If you are under age 55 and withdrawing from a 401k or under age 59 1/2 and withdrawing from an IRA, you may be assessed a 10% early withdrawal penalty. You can work with a tax advisor to see if you'll be eligible for an exception.

Also note that withdrawals from your 401k will be subject to a mandatory 20% withholding. This withholding may or may not cover the total taxes due, so be sure to plan for how this will affect you when you file your tax return.

Your Age:

If your job ended during or after the year you turned 55, you can take withdrawals from your 401k without paying the 10% penalty. Income taxes still apply, and so does the 20% mandatory withholding.

Roth Conversion (as Phillip mentioned):

Amounts converted to a Roth IRA must be held for 5 years to avoid the 10% penalty, so this strategy would not work in your situation.

Best wishes to you and your family!

1 Comment   |  Flag   |  Aug 05, 2014 from Midland, MI
David Wayne

GOOD DAY
I'm David, i am from Delaware State, 7 DICKERSON ST HARRINGTON, DE 19952-1302
I AM ON THIS SITE TO SHARE BRIEFLY HOW I WAS HELPED AND WAS ABLE TO GET A LOAN THAT I HAVE BEEN BIDDING FOR, OVER A LONG TIME NOW. I APPLIED FOR A LOAN IN " HALIFAX " AND I GOT MY LOAN FROM THEM. WITH A LOW COST OF INSURANCE, AND I GOT MY LOAN AT 4.50%. ARE YOU LOOKING FOR A LOAN FOR ANY PROJECT? CONTACT HALIFAX BANK PLC FOR A STRESS FREE AND FAST LOAN.
THANK YOU, AND I WISH YOU GOOD LUCK IN ALL YOUR ENDEAVORS.

CONTACT EMAIL: halifax_ivandepartment@yahoo.com

Flag |  May 30, 2017

1|600 characters needed characters left
1 vote

As the others have explained, withdrawals from a retirement account before age 55 (401k) or 59 1/2 (IRA) are taxable and have an extra 10% penalty. I have had clients in your situation and sometimes it is unavoidable to tap the retirement account, but keep in mind that you will end up owing the tax on the amount by the next April 15th. I had a client who took retirement money out while he was unemployed and then need to take money out again to pay the tax bill. Note that custodians are supposed to take out 20% withholding, but in my experience they don't always do it and in any case 20% may not be enough with the penalty.

Are there any other sources of cash that you can use first? Have you signed up for unemployment benefits? Sometimes people don't file because they have a moral objection to taking money from the government, but if that is the case with you, I would urge you to file because this is actually an insurance program and your company has paid into the fund on your behalf. So take the money. Do you have a universal or whole life insurance policy with a cash value? Definitely borrow on the cash value before hitting the retirement accounts. How likely are you to get work? You could borrow on credit cards in a limited fashion if you are close to getting work and will be able to pay it off. Be really careful about this, though. I would be even more careful about borrowing on home equity, since you don't want to risk losing your house any further.

Its a tough time, but keep looking for that new job. Network as much as possible to meet people who might be able to help you. Lots of people keep their unemployment to themselves because they are embarrassed, but your best bet is to let as many people as possible know that you are looking for a job because someone might know someone who is hiring. Good Luck!

1 Comment   |  Flag   |  Aug 05, 2014
David Wayne

GOOD DAY
I'm David, i am from Delaware State, 7 DICKERSON ST HARRINGTON, DE 19952-1302
I AM ON THIS SITE TO SHARE BRIEFLY HOW I WAS HELPED AND WAS ABLE TO GET A LOAN THAT I HAVE BEEN BIDDING FOR, OVER A LONG TIME NOW. I APPLIED FOR A LOAN IN " HALIFAX " AND I GOT MY LOAN FROM THEM. WITH A LOW COST OF INSURANCE, AND I GOT MY LOAN AT 4.50%. ARE YOU LOOKING FOR A LOAN FOR ANY PROJECT? CONTACT HALIFAX BANK PLC FOR A STRESS FREE AND FAST LOAN.
THANK YOU, AND I WISH YOU GOOD LUCK IN ALL YOUR ENDEAVORS.

CONTACT EMAIL: halifax_ivandepartment@yahoo.com

Flag |  May 30, 2017

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