401(k) retirement plan is risky to your wealth
Date: Sat, 10/22/2005 - 15:48
401(k) Retirement Plan is risky to your wealth
401(k) retirement plan should not be used to solve your situation when you are going through some financial troubles. It should be considered as the very last option instead of using it at the first choice. Please go through some important points that have been described in this article.
When you borrow money from 401(k) retirement plan, you are actually taking out money from your vested account balance. Later you will have to pay it back to your account along with some interests. It should not be used to solve your existing financial troubles and increase the overall expenses.
As per the rule, you can either borrow up to 50% of your vested account balance or take $50,000, whichever amount is lesser. When you borrow this money for your first home, you get a longer period of time to pay it off, otherwise you will have to deposit the money back to your account within a maximum period of 5 years.
Unless your financial situation is critical and you don't have any other options left, you can do it. But if you are below 59 ½ years, there are no charges on penalty except 10% on being distributed early.
The advantages of borrowing money from the 401(k) retirement plan
The disadvantages of taking 401(k) retirement plan
Other options
401(k) retirement plan should not be used to solve your situation when you are going through some financial troubles. It should be considered as the very last option instead of using it at the first choice. Please go through some important points that have been described in this article.
When you borrow money from 401(k) retirement plan, you are actually taking out money from your vested account balance. Later you will have to pay it back to your account along with some interests. It should not be used to solve your existing financial troubles and increase the overall expenses.
As per the rule, you can either borrow up to 50% of your vested account balance or take $50,000, whichever amount is lesser. When you borrow this money for your first home, you get a longer period of time to pay it off, otherwise you will have to deposit the money back to your account within a maximum period of 5 years.
Unless your financial situation is critical and you don't have any other options left, you can do it. But if you are below 59 ½ years, there are no charges on penalty except 10% on being distributed early.
The advantages of borrowing money from the 401(k) retirement plan
- You don't have to go through any credit check. All windows of getting this loan are open.
- During early distribution, the rates of interests at this plan are a couple of percentage points are higher than the prime rate
- The return on investment is great. You pay back to your account at a higher rate of interest. This makes the deal better.
- No taxes on interest levied before retirement when money is taken out of the plan.
- The cash is available at a phone call.
The disadvantages of taking 401(k) retirement plan
- Your plan gets hurt when you take out money from your own account before the date of maturity and lose the interests.
- Literally speaking, you have borrowed money from your account. But in actual, you are spending it rather than saving.
- As said you don't pay taxes on interests before the retirement. But if you look at it deeper, when you pay money from your salary or your bank account, it's coming tax-deducted. You will have to earn more to save the taxes within the tax brackets.
- Before the age of 59 ½ years, you have taken out money before the date of maturity. Thus, you owe federal and state tax as well as the 10% penalty charges
- At all costs, you will have to pay taxes on the loan amount. That doesn't come tax deductible.
You are disturbing the whole system of the retirement plan now. Imagine, you will have days of retirement ahead. If there is no money later, old age will seem tougher. 401(k) should be kept untouched at all costs.
Other options
- If you have a home, get a home equity loan. You can deduct the interest on your taxes if you borrow money within the value of the home.
- Other option is to use your low interest rate savings account or approach a financial institution.