Borrowing from your 401(k) should be your last resort. Explore other options first as it can be very difficult to make up for the lost earnings you can obtain in your 401(k) and it will impact your retirement income. If you must borrow for your 401(k) you need to first contact your HR department to find out if they offer a loan provision. Keep in mind that when taking a loan from your 401(k) there are certain rules, such as you can only borrow the lesser of 50% of your vested balance or $50,000. You repay the loan through salary deductions with interest with after tax dollars. Because of the cost, many plans also set a minimum amount (often $1000) and restrict the number of loans any participant may have outstanding at one time. If you default on the loan any unpaid balance will be classified as a distribution and you would be subject to income tax and may also be subject to a 10% withholding penalty. Remember, the purpose of a 401(k) plan is to fund your retirement, so don’t shortchange your golden years by treating it as a checking account.
Disclosure: The posted information is for informational purposes only. This message does not constitute an offer to sell or a solicitation of an offer to buy any security. All opinions and estimates constitute Karp Capital's judgment as of the date of the report and are subject to change without notice. Accordingly, no representation or warranty, expressed or otherwise, is made to, and no reliance should be placed on, the fairness, accuracy, completeness or timeliness of the information contained herein. Securities offered through Financial Telesis Inc., member SIPC/FINRA. Financial Telesis Inc. and Karp Capital Management are not affiliated companies.
Probably. But it is a really bad idea. Do yourself a favor and don't do it. Find the money elsewhere.
When an employer sets up a 401(k), they have an option to provide loans in the plan document. If the plan document says you can have loans, then basically, you can borrow up to 50% of your vested balance, up to $50,000.
With that said, unless it is an absolute dire emergency, it is a really, really, bad idea. First, there is the premise that Uncle Sam allows you the tax advantage of a 401(k) for the purpose of encouraging you to save for retirement. Money that goes in is earmarked for your retirement. However badly you think you need this money now, just wait till you get to retirement. Short of a large inheritance or hitting the lottery, it is almost certain you will need it more then.
Second, you will be subject to double taxation. You would be withdrawing pre-tax money, but will have to pay it back with after-tax dollars. And if you default or lose your job, you will have to pay income tax plus a 10% penalty.
As difficult and uncomfortable as it feels, you need to develop discipline and have a financial plan. Unless it is well thought out and there is a true need, you should never take a loan on your retirement.
You may be able to borrow from your 401(k) if the plan allows for it. 401(k) loans are a provision that a plan sponsor (your employer) can choose to either include or exclude in the plan. Consult your employer or HR department to find out if the plan allows for loans. If it does allow for loans, you will also need to ask how much you are eligible to borrow. Some plans only allow a participant to borrow from certain "sources" in the plan. For example, you may only be able to borrow from the amount of money you personally deferred into the plan, and not any of the employer contribution. Regardless of sources, by law you can only borrow the lesser of 50% of your account balance, or $50,000.
Assuming your plan allows for loans and you choose to initiate one, it must be paid back, with interest. Some people believe that they are wise for taking a 401(k) loan because the interest on that loan is paid back to their own account. They consider it a wise investment because "paying themselves." Generally, loans cannot be taken out for longer than 5 years, and the interest rate will be in the 4-5% neighborhood. Again, check with HR for specifics on your plan.
Be cautious with 401(k) loans for two reasons: 1. If you don't pay the loan back (for example, if you lose your job and can’t pay the loan back immediately) the loan becomes income to you. That means that the outstanding balance will be taxable, including early withdrawal penalty if you are under age 59 and ½ .
Hope this was helpful!
If all else fails, depending on your age, amount in your 401k and the plan itself, you may be able to set up what is called a substantially equal periodic payment, sometimes referred to as 72(t), the IRS code to which it refers. It could help you avoid the 10% penalty on a withdrawal, but I only recommend it as a very last resort and only if it would work based upon your situation. Since, it should only be as a last resort, and is truly very complicated, I won't get into the details here, and stress that if you were to consider it, you should seek the help of a qualified financial and tax professional to do it.
The 72(t) could be a workable strategy, but probably based on your age, it won't generate the kind of cash you are looking for. At least that has been my experience with working with 72(t). I guess I am making the assumption you are under 50 Joseph. But repeating the above, don't do this if you don't have to. Failing to repay a loan such as this will, possibly, result in a sizeable tax bill.