Most of the employers also allow their employees to borrow money from their 401(k) account, in the form of 401(k) loan. It is observed that most of the 401(k) participant who is having loan option in their account, only 20% have an outstanding loan at any given point in time.
Most of the employee feel like borrowing from their account rather than from banks or other financial institutions.
When you want to take a loan from your 401(k), it is not that easy as it appears, and in this articles, we will discuss the important things related to 401(k) loan or borrowing.
As you are being offered a loan through your 401(k) account, but that does not mean you should opt for it. It is seen in most of the cases, that taking a loan from of the cases your 401(k) account is not advisable.
But due to circumstances, you have made up your mind to opt for a loan through your account then you should consider all the pros and cons and understand all the guidelines before signing the loan documents.
Below are some relevant facts related to 401(k) Account Loan:
401(k) Loan has Borrowing Limits
Usually, the loan amount which you can borrow from your 401(k) account is up to $50,000 or half of amount which is available in your 401(k) account.
You should start paying the loan as soon as you get your next paycheck when you are granted the loan. Usually, the repayment is made through the automatic deductions from your paycheck.
401(k) Loan Don’t Have Lengthy Repayment Duration
You should pay the loan amount within five years of repayment period unless you have used your loan amount to purchase a house.
In case you have used your loan amount to buy a house then the loan repayment duration can be extended, but you should continue working with the company and don’t risk for termination.
401(k) Loans Don’t Need Credit Check
In case you have opted for 401(k) loan then the credit check will not be done as technically you are not borrowing the money you are just using the money in the form of loan from your own 401(k) plan.
So, you just tap into your retirement funds temporarily, and no entity is loaning you the money so there would not be any need to check your credit limit. But obviously, interest will be incurred on the amount which you will be using as a loan.
401(k) Loan has Competitive Interest Rates
When you opt for the loan through via 401(k) plan, then the interest rates will be competitive it does not matter how is your credit score. It may always happen that you must be enjoying high credit score rating, but as you opt for a loan as a pre-distribution, you need to face the competitive interest rates.
But still, the good news for you is that you just make the repayment added with interest to yourself and not for any bank or financial institutions, and you should understand that the entire loan principal amount added with interest which you pay will go to in only your 401(k) account.
401(k) Loan is Usually Having Low or No Application Fees
As you are getting a loan from your account and most of the times, it is not also considered as a loan, so there is usually no or decidedly fewer application fees for the loan. But if your plan has an origination fee, then it will most of the times goes into the plan administration and not into your account.
Most of the 401(k) loan plan use to charge about $75 for per loan application. So when you need to opt for the loan, you should also consider the loan amount because if you have opted for the loan of the low amount, you will lose $75 as your loan application fee.
Investment Growth May Be Affected By 401(k) Loan
It should be kept in mind the amount you borrow from your 401(k) account in the form of a loan will not be included in your account till the time you make full repayments, so that amount will cease to grow in your 401(k) plan.
So, until the time your loan repayment is going on you forgo all potential investment gain for the borrowed amount. And it may also happen that you may lose the growth in an amount in the form of compound interest.
It should always be in your consideration that when you are borrowing any amount from your 401(k) plan, it means you are hiring for your future retirement investments. Even if you pay back the loan amount with interest, you won’t be able to make up the lost money growth in your 401(k) plan.
One other important point which you should consider is that you repay your loan amount with post-tax money. So, when you opted for the loan the same amount can be deducted from your account and in a worse situation when you take money out of your 401(k) plan, you need to pay the taxes on the same amount again.
401(k) Loan Is Employment Dependent But Still Got Few Benefits
Most of the people don’t aware of this is that loan through your 401(k) is also employment dependent, means you can lose your job in the course.
The main reason for the termination is that the 401(k) loan guidelines are attached with your employment status with your employer, and in case you stop working with your employer then you have only sixty days to repay the remaining loan balance.
If you fail to pay back the remaining loan balance the remaining amount will be considered as a distribution and subjected to federal taxes, income taxes, and early distribution penalties.
But still, loan through 401(k) plan has got few benefits like when you are in immediate financial crisis you can opt for 401(k) loan. Because if you are not terminated during your repayment of the loan amount you can always avoid paying income taxes and other penalties which are incurred on distribution.