As the economy continues in a downward spiral people are finding they can’t meet their bills. Increasing gas prices, increasing utilities and interests rates rising lead to difficult financial situations. People are looking for ways to meet their financial obligations. One of the options is borrowing from a 401K.
Typically the process of borrowing from a 401K is a speedy one. After all, the employee is borrowing the money from themselves. The loan is guaranteed to be repaid.
Any 401K plan usually has restrictions for what amount can be borrowed and what conditions are in place regarding borrowing. Some of these conditions include only borrowing for unplanned medical expenses, tuition and avoiding eviction. For example, if an employee can’t make their mortgage or rent this would be an acceptable reason to borrow from the 401K. Whatever guidelines are established must be followed to avoid penalties.
It is important to be sure that when an employee borrows from their 401K they plan to maintain employment. If the employee resigns or is terminated before the 401K loan is paid, back the remainder of the loan will be added onto the employee’s tax liability for that year.
It is important to remember that when the money is borrowed from the 401K it is being borrowed from the retirement of the employee. Yes the money will be added back into the employee’s 401K plan as it is repaid, but while it is out on loan it won’t be earning money for the employee’s retirement. If the employee is reasonably close to retirement it is probably not a good idea to borrow from the 401K if it can be avoided.
The employee needs to be certain they can live with the payment schedule that is set up. The employer will take the repayment money out of the employee’s paycheck over a period of time. The plan manager will then distribute the money back into the employee’s 401K.