401k Loan Pros and Cons
When it comes to 401k retirement plans there is a lot to consider, you've 401k limit deductions, 401k loans, Rules , and more. Here's a look at the pros and cons as they relate to the 401k loan.
A 410K loan is taken out against your 410K retirement plan,
which is why many financial planners don't advise their clients to take this path. When you take out 410K loans, you put at risk your retirement savings. This means you could find yourself under-funded in your later years.
You are allowed to withdraw funds from your 410K plan at any time, but these withdrawals come with a steep tax penalty, making this a less viable option for most people. If you are thinking about a 410K loan, weigh up all the pros and cons before making a decision. The government hasn't any regulations regarding these loans but you may find that your employer has certain limitations that apply. You may be limited in the number of loans you can have, you may need your spouse's signature on the documents and you may need to keep a certain balance in your account.
You can expect the administrator of your plan to impose conditions on a 410K loan also. You will need to prove a valid need for the money, and it will only be considered if it is for outstanding medical expenses or mortgage repayments, preventing bankruptcy, college fees or a home deposit for a first buyer. A 410K loan will not be approved to pay for day-to-day living expenses.
The pros of taking a 410K loan include the simplicity of the application process, the fact that any interest that you pay will be put back into your plan account and it is a loan that is free from risk as you have borrowed your own funds.
The cons are that any interest paid is non tax deductible, there may be a limit on contributions until the loan is paid in full which means that any employer contributions you are entitled to, won't be paid during the term of the loan, and the loan's term is quite short compared to other options. But just like 401k limit restrictions it's important to understand the rules when it comes to any 401k dealings.
A 410K loan should be considered as a last resort because there are some good alternatives that might be better options for you. Take the pros and cons into account when deciding how suitable 410K loans are for your circumstances.
