Withdrawals and Loans from 401K
Hardship
Withdrawals and Loan from 401K Retirement Plan:
The goal of retirement savings
plan is to ensure maximum financial security for you in your golden days.
Savings you make through your contributions towards your retirement plan
ensures you financially comfortable retired life. What I mean is that retirement savings plans are
basically aimed at your post retirement life. Considering this fact one must
avoid withdrawals and loan from retirement plans. Having said this, I concede
that one may face certain hardships where he has no other financial option left
other than withdrawal or loan from retirement plan. If you are facing such
situation and are thinking to opt for loan or withdrawal from 410K retirement
plan you must know the pros and cons of such loans and withdrawals from 401k retirement
plan. Considering the federal government has made provisions to permit plan
administrators to grant loans and hardship withdrawals from 410K retirement
plan.
Loans from 401K
Retirement Plan:
The main benefit of
acquiring a loan from 401K Plan is that the proceeds of this loan are exempted
from taxes and penalty fee, barring the default cases. There are no
restrictions or laid down guidelines on the use of loans acquired from 401K retirement
plan. However, some plan administrators have put restrictions like number
of outstanding loans and minimum balances of loan. Basically, companies do this
to decrease administrative costs. Some companies/plan administrators ask the
employees to obtain consent of their spouse, if they are married, before
obtaining the loan.
401K Individual
Loans:
Like other 401K plans
401K sole proprietor plan and 401k
small business owner’s plan also offers your facility of loan to overcome
your financial hardships. This provision is also applicable to owners having
business that is not incorporated.
Establishing a 401k plan
and contributing towards it may provide significant benefits to 401k
individuals and solo proprietors of small businesses in reducing company and
personal taxes. This also enables you to make more secured tax-deferred savings
when compared to other methods which are in vogue traditionally.
Usually, an employee is
allowed to borrow maximum up-to 50% of the account balance. The upper limit is
set at $50,000. If an employee has already availed loan from 401K plan during
preceding one year, he can borrow 50% of his account balance to maximum
$50,000. His outstanding loan will be deducted from this amount of loan. Except
in the case of home purchases loan, all other loans obtained from 401K plan are
to be refunded within period of succeeding five years. If you have acquired
loan for home purchases, you are eligible to get longer period for repaying
your loan.
No doubt, the proceeds in
your 401K plan account are your money. Still you have to pay interest if you
are acquiring loan from this account. Generally, plan administrators/employers
decide the interest after adding one or two percent to the existing prime rate
of interest. You may be paying interest on your own money but doing this you
are benefited in two ways:
- Firstly the amount of interest you pay to 401K plan
is tax exempted
·
Secondly,
whatever amount you pay as interest you are sure to get it back at the time of
retirement in the disbursement form. Think if you had taken a loan from a bank
and paid the interest?
When you are ineligible
for loan or your company does not provide you loan facility from 401K plan, you
can still access the cash from your 401K account by means of withdrawal. You
must fulfill following criterion to get withdrawal from 401K savings.
- When you are facing severe financial crunch and need
immediate cash - The amount of loan applied by you must match with the
amount of the purpose for which you are seeking loan. Later should not be
greater than the earlier. - Your all other sources have exhausted and your
requirement justifies the withdrawal.
·
You
have no other option to exercise under provisions of 401K plan, like loan, and
non-taxable and distributable loans from 401K plan have been already availed by
you.
If you meet the above
criterion, you may acquire cash by means of 401K withdraw. There are laid down
purposes for which you can exercise withdrawal.
- Purchase of a home
- For acquiring higher education. This includes
expenses on boarding charges and tuition fees for one year. You can obtain
withdrawal under this category for yourself or your dependants and spouse.
You can also get withdrawal from 401K plan for your children even though
they may not be dependent on you. - For preventing foreclosure or eviction of your
residence - You can utilize withdrawals from 410K Plan for
medical expenses, specifically those which are tax-deductible and can not
be reimbursed, for yourself, dependents and spouse.
You must understand that
all hardship withdrawals from 401K plan are
subject to tax deductions and you have to pay 10% penalty. Obviously, you get
considerably smaller amount and also have to forgo tax-deferred growth of your
assets. You can not pay back the amount of withdrawals from 401K plan after it
has been disbursed.
Date: 21 May 2008, Wednesday
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