The idea of a 401K is for retirement, so it isn't easy to get at the money. You'll get hit for 10% right out of the gate to discourage you from using it like a savings account. The additional tax hits appear in various forms. You can't contribue while you are paying back, so you have a higher gross income, and miss out on the money (including match) that your account could have been making. If you don't pay back fast enough you get hammered on additional taxes and penalties etc etc. You will lose money because not only do you pay a premium for the cash (10% upfront + interest rate on repayment, another 8-12%; you also miss out on the tax savings and money contributions (+ match) you would have had over the life of the loan.

Short term the $5000 will probably cost you $7500 or more; long term losses to your account (depending on your age etc) could be as much as $20,000 or more.

As for vested. Vested is a term that refers to your ability to access the money the company has contributed to your account, as in: "He has worked here for 5 years so he has a vested interest in a career here, I suppose we can let him at all the money." The length of time before you're vested varies, so check before you attempt to get at your "$15,000", because it may only be $7500 of your money. The plan may not allow you to access the cash at all if you aren't vested.

Sounds like you need to talk to the administrator of the plan, or hold up a liquor store.

 

Your abilities are being wasted at the phone company.

 

flafonman, just wondering have you ever thought about becoming a financial planner? You seem to know a lot about all of this

Thanks for the information. I dont need to take all of the money but all I want is 5k that I will repay within 3 years. I didnt know that I would take a 10% fall though That kind of sucks.

 

Let that be a lesson to all of you. Next time someone calls from the Phone Company don't hang up, just because you don't want to change your long distance service does not mean that you can't ask them for advice on money management, deep-fat frying, or anything else that is troubling you.

I know these people, they are glad to help out.

 

NO you face NO penalties for borrowing money out of your 401k account. The only time you will see a penalty is if you do NOT pay it all back on time and on schedule. Then it is a 20% penalty and then it gets taxed as income another 10% penalty on top of the 20% ONLY if you do not pay it back and the penalty is ONLY on the amount NOT paid back.

You need to talk to your plan administrator to see how much you can “legally” borrow without facing any penalties. I know this for a FACT because I have borrowed money out of my 401k and NEVER paid any penalties and they are “federally” regulated, which means they are all the SAME rules…

 

I don’t know where you got the “can not contribute to the plan while paying back” because I never had a problem with that. I have had loans before and continued to contribute while paying the loan back. I think you might be right that you can “not” contribute a higher percentage of your earnings while paying a loan back.

The penalties he is referring to is “early withdrawal” which is 20% that means you are taking money out of your 401k and do not intend to pay it back at all. You are asking for a loan through the 401k account which is a different ball game, you lose no money except if the stock market takes off and pays more interest then you would be paying yourself for the loan.

The interest amount on your 401k “loan” is money you are paying YOURSELF no one else, that interest does NOT go to the 401k company as profit, it ALL goes back into your account. You have to remember it is already your money to begin with so how could someone charge you interest? For what writing a check?

Second if your loan is done where they automatically deduct it from your paycheck you do not have to worry about time frames in paying it back. They will figure out a time frame it needs to be paid back in and it will be legal with no penalties unless of course you quit your job before it is paid off and do not continue making payments. However ONLY the money that is not paid back is subject to penalties not the entire loan amount.

If you can not get a loan at a back, or they want to much interest then your 401k is an excellent choice…

 

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Feel better 01?

I admit that as a financial planner I make an excellent phone man; however my comments were strictly to help shed some light on the situation, and I also advised GG to talk to the plan administrator.

 

I agree- gotta talk to the plan administrator.

Every 401(k), while needing to meet Federal regulations, generally has its own set of rules too. For example, my previous 401(k) allowed taking loans for nearly any reason. My current 401(k) allows NO loans, period. A medical hardship provision is in place though.

We could talk all we wanted here but without knowing that plans actual rules, tough to give advice!

In general, its not a good idea to draw money from your 401(k) unless it is absolutely necessary. Ultimately it only costs you at a rate which may be MUCH higher than the interest you pay back.

 

 

Excellent post, read it all. I will probably re read it a few more times. What if something goes wrong and I decide to leave my company, will I have to pay all of the money I borrowed right then and there or can I repay them when I tranfer to a new place?

 

 

Mike's cut and paste from his 401K paperwork illustrates a few of the reasons why this isn't such a hot idea.

My 401K requires that you pay the full ammount borrowed in the event that you leave the company; however your milage may vary-see dealer for details.

I know it's none of our business, but what do you need $5000 for? Hitting your 401K is a big deal, is this all worth it?

 

It is kind of personal but it will help pay medical bills for my aunt. I have been advised that there is a site that has info where I can see what could happend and what payments would be so when I get home I will check it out. Thanks for the help, I'am sure that I was not the only one that found this post useful. This is a ford site but I know only intelligent people drive these trucks so thats why I asked

 

GASGUZZLER007,

Here's my personal experience with borrowing against 401k. I borrowed 10k for my wedding. I pay $55 a week out of my check for 60 months. No penalties or any of that. I don't see it, so I don't miss it. Oh, and I am still able to contribute to my 401k while I'm paying off the loan. Hope this helps some if you still had questions.

Bob

 

It can't be stated enough, but talk to your plan administrator.
FYI.....not all plans allow you to borrow money. We have one here where we can not borrow the money. We can cash out based on hardship cases (paying the penelties), but can not borrow.

-jeff b.