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Loans Against 401k
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Loan against 401K plans are quite popular. The 401 K plan is a retirement plan that is employer funded. The plan is called as 401K after the name in the US Internal Revenue Code. With the help of this plan the employee can save money for the retirement with an advantage of surpassing the income tax on the saved money.
The employee is eligible to decide how he should invest the money that is accumulated in the retirement fund. The amount in the 401K retirement plan can be withdrawn only on retirement but there are also conditions of premature withdrawal when the person can withdraw money in case of a total disability. If there is any other reason for premature withdrawal then this can only be done after paying penalty of 10% and paying the normal income tax.
There are a number of schemes under which people can borrow against the 401K plan. Most of the loan programs allow the borrowers to borrow money against their funds. With the help of these loans people can borrow a lot of money and these loans can be used for varied purposes. These loans are usually used to fund the education of their children, meet the medical expenses, buying a house, debt consolidation etc.
When people borrow against the 401K plan there are many advantages that they can avail. The foremost and the most beneficial advantage is that people dont have to undergo a credit check this is due to the reason that the person is borrowing against his/ her own money. Besides this when you apply for a Loan against the 401K plan you would qualify for the loan there is no doubt about it as generally there are not many restrictions. With the loan against the 401K plan there are very few formalities and the process of applying and the application is also simple and easy to fill. Apart from this the loan is given fast usually within a week of applying and at times if you just enquire about the loan through phone the lenders might send someone to your house to complete the application process.
The interest rates on these loans are generally lower as compared to other loans. Besides this the interest that you pay towards the loan is credited to the 401K account. In case the amount of interest that you are paying is more than the return then you would be accumulating a greater amount for your retirement. Besides the loans against the 401K plan are not shown on your credit report. This would mean that even if you default on the loan it does not spoil your credit report.
When taking a Loan against the 401K plan you should also keep in mind that if you change your employer or your employment is terminated then you are required to pay the whole amount of the outstanding loan immediately. In most of the cases the money is to be paid back within 2 months of leaving the job but in some cases the employers also insist that the money be paid back within one month. In case you fail to repay the amount then the case is considered as default and if you are under the age of 59 then you would have to pay a pre-mature withdrawal penalty of 10% and the tax on the amount. There are also cases where the 401K plan can be transferred to the new employer or to the personal retirement account. The monthly payments are deducted from the salary directly and this would mean that your take home salary would become less.
With the loans against the 401K plan you can usually borrow up to 50% of the amount in your account. In case you have taken a loan in the previous 12 months then the loan amount that you can borrow is less. The repayment period for these loans is usually 5 years and the payment is done on a quarterly basis. But in case the loan is taken to buy the first house then the loan can be repaid over a maximum duration of 30 years. When you borrow against the 401K plan you are not required to make any tax payments on the interest of the loan. The interest cost is immaterial and you pay it back to your account.
Before you take a Loan against your 401K plan you should work out other options also. In case there is no other option left then you should go in for these plans. The money that is accumulated for retirement is something that should not be misused. You should use your 401K plan only in case of emergency and if there is no other option left. Moreover borrow only that amount which you think you can pay back in the specified duration of time. Besides this when taking a Loan against the 401K plan you should consult a financial expert and get his advise as to whether this would be the best option for you or not.
In case you are thinking of changing your job or you fear a lay-off or you are not close to the age of retirement you should keep away from the Loan against the 401K plan. These loans should be taken only when there is a case of emergency. Do not misuse the loan money for your daily expenses or for luxuries. Make sure that whatever you are borrowing the money for is a productive deal.
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