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I have about $20,000 after tax $ in my 401k. I have about $10000 I am paying on a PLUS Loan at about 7%. Can I withdraw the $10000 from my 401 K to save paying the higher interest rate on my Parent Loans? Would my 401k have a penalty or growth suspension?

I pay $250 a month on the PLUS Loan. I could save that in the future.

Nov 07, 2012 by C from Foristell, MO in  |  Flag
5 Answers  |  8 Followers
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8 votes
Peter C. Karp Level 20

C,

Could you please clarify your first sentence, do you have a Roth 401k? 401k contributions are pretax deferrals unless it is a Roth 401(k).

You can not take money out of the 401k unless you are at retirement age as per your plan document. If you have a loan feature in your 401(k) plan you could take a loan, however you can only borrow up to $50,000 or 50% of your vested balance, whichever is less. In your example you could borrow $10,000 if the $20,000 is fully vested. Your summary plan description will provide the specifics. Payments are made through salary deferral with interest usually at Prime plus a small percentage, such as 1-3%. Again, you will need to check in your plan document to see if deferral contributions can still be made when you are making loan payments. Please call me if you would like to discuss further.

View all 6 Comments   |  Flag   |  Nov 08, 2012 from San Francisco, CA
Tara

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Flag |  Nov 13, 2016

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4 votes

Hi, You have another alternative which I would suggest you look into. You can borrow up to 50% of your 401(k) assets, up to a limit, and repay it back to yourself over 4 years. The pluses here are that when you pay yourself back you are also paying yourself interest on the loan amount. The downside is if you have a separation of service event at work, you would be required to make a complete payment, and lose your 4 year repayment window. You need to speak to your HR person for the correct paperwork for these distributions. Good luck.

2 Comments   |  Flag   |  Nov 08, 2012 from Narragansett, RI
C

Thanks. We have borrowed from our 401k before and actually ended up paying ourselves back a higher interest rate than the market did (2008-2009) I was just hoping their was an allowance somewhere to pull money out rather than borrow or pay a penalty.

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Flag |  Nov 08, 2012 near Foristell, MO
Tara

Hello.

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Thanks for your time as we await your response..

Flag |  Feb 18, 2016

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4 votes
Adi Benyishay Level 13

The only provision that is available for you is the borrowing availability. If you withdraw the $10,000 out of your 401(k) you’ll be subject to the 59 ½ IRS rule of 10% penalty + income tax. The only way to avoid this is by proving a hardship. Paying back a loan early is not considered a hardship. Sometimes it happens that the loan interest is better than the market performance.

Comment   |  Flag   |  Mar 18, 2013 from Southampton, PA

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C Only if your 401k allows for in service distribution of the after tax portion - which I am assuming is either a Roth 401K or an after tax company savings plan. I would really need to check the plan document specifically. Your idea is fine if you are not subject to income tax or penalty and you are happy with a 7% return on your money. I am in your vicinity if you want to contact me to discuss further. Good Luck Mark Schreiber CPA

Comment   |  Flag   |  Nov 07, 2012 from St Louis, MO

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You may be able to take your after-tax contributions immediately depending on what the document states. I think you are considering a distribution figuring the after-tax contributions will not be taxable. In fact, the gain on the after-tax contributions is pro-rated and you will pay tax on the portion that is gain. Depending on the performance of the assets, the tax could be substantial or minimal. Contact me if you need a calculation of the taxable amount.

You can take a loan from your plan, but you lose the growth you would have had if you kept the money in the plan. Take a home equity loan which will have a lower interest rate and is tax deductible.

Comment   |  Flag   |  Feb 19, 2013 from Montgomeryville, PA

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