Hey now, that's my undergraduate degree! And I *am* smarter than everyone else! 
Borrowing from 401k?
- Thread starter pdwst33
- Start date
The rules for what you can do with a 401K are on the IRS web site. If you outright withdraw it, you pay the tax plus a penalty. You can borrow up to 50% or $50,000 whichever is smaller but you have to pay it back on a certain schedule.
It can be borrowed for anything.
It can be borrowed for anything.
I'm not sure about 401k specifically, but many retirement plans allow unpenalized withdrawals for first-time home buyers. Also, a house can be considered an investment so other retirement plans allow for such purchases. Obviously, you'll need to discuss this matter with a professional, perhaps an accountant.
I'm not sure I would ever do this, but I did do the following: take the rollover piece of my 401(k) and put it in a brokerage account in an IRA.
I only discovered I could do this a little while ago. The rollover piece was very small, in comparison to the rest of my account, but it still meant that I could use it to experiment in ways I couldn't in my regular 401(k) account.
So, for those who have switched jobs and have all their money tied up in their employer's 401(k) plan still, realize that you may (depending on the plan rules) be able to take the rollover part from previous jobs and put it in a self-directed IRA where the only restriction is that you won't be able to go on margin, which is against IRS rules for a retirement account.
I only discovered I could do this a little while ago. The rollover piece was very small, in comparison to the rest of my account, but it still meant that I could use it to experiment in ways I couldn't in my regular 401(k) account.
So, for those who have switched jobs and have all their money tied up in their employer's 401(k) plan still, realize that you may (depending on the plan rules) be able to take the rollover part from previous jobs and put it in a self-directed IRA where the only restriction is that you won't be able to go on margin, which is against IRS rules for a retirement account.
I just did that. Left my employer so I closed out my 401K and directed them to send the check to my self directed IRA at Schwab. I did it all online.... on Tuesday, and managed to cash out of my diversified equity fund at Tuesday's close. The check is in the mail. The opportunity cost of being out of the market on Wednesday was about $4k. Oh well.....
Yup, I did that on my last job move. Best thing I ever did. I liquidated the whole mess and rolled it into a traditional IRA at InteractiveBrokers.
Hey guys,
I work with 401K plans so I'll try to clear up a few things.
Every plan is different, whether you can take out a loan at all (some plans don't allow them) or what type of loans you can take (general purpose, primary residence, hardship) is determined by your company when they setup the plan.
The time you can take to pay yourself back is also set by your company, typically general purpose loans have a max payback time of 5 years.
Some plans require paperwork like a credit agreement and spousal consent form (sometimes this is required even if not married).
The rate of interest is also set, a common one is either prime, prime +1, or prime + 2%.
**Important note about the interest** While it's true you are paying the interest back to yourself, it's important to note that you are double taxed on the interest. When you contribute money into your account pre-tax, obviously you don't pay taxes on the funds. When you pay yourself back from your paycheck, the payback is with after tax dollars. This is a wash regarding the principal portion of the payback because when you request a loan, they give you a net check. However, the interest is paid back to your account after tax, but is not treated that way once it is put back in. Therefore, when you finally withdraw your money, the interest dollars (which have already been taxed) will be taxed again at your current fed and state levels.
Another important item you need to check is to see what types of fees, if any, the plan charges. Many don't have any at all, but some have not only an origination fee (I've seen these as high as $100) and maintenance fees, typical amounts are $10 or $15 per year, charged proportionally every calender quarter.
Some have mentioned before, the most you can ever borrow from you account is $50K, though some companies set lower limits. You can only borrow from vested dollars, and some companies also restrict the sources of money you can borrow from. For example, some companies don't let you borrow from company match sourced dollars.
One last thing that was also already touched upon, if you leave the company and don't pay it back within a certain period of time, usually 90 days (some plans allow manually payments for former employees) or if you stop receiving a paycheck (out on disability) the loan may deem distribute (default) and you'll have to pay income taxes on the oustanding principal plus accrued interest from the last loan payment. In addition, if you are under 59 years and 6 months, you'll have to pay an additional 10% penalty. Depending on the size of the loan, keep in mind it can put you in a higher tax bracket.
Hope this helps.
I work with 401K plans so I'll try to clear up a few things.
Every plan is different, whether you can take out a loan at all (some plans don't allow them) or what type of loans you can take (general purpose, primary residence, hardship) is determined by your company when they setup the plan.
The time you can take to pay yourself back is also set by your company, typically general purpose loans have a max payback time of 5 years.
Some plans require paperwork like a credit agreement and spousal consent form (sometimes this is required even if not married).
The rate of interest is also set, a common one is either prime, prime +1, or prime + 2%.
**Important note about the interest** While it's true you are paying the interest back to yourself, it's important to note that you are double taxed on the interest. When you contribute money into your account pre-tax, obviously you don't pay taxes on the funds. When you pay yourself back from your paycheck, the payback is with after tax dollars. This is a wash regarding the principal portion of the payback because when you request a loan, they give you a net check. However, the interest is paid back to your account after tax, but is not treated that way once it is put back in. Therefore, when you finally withdraw your money, the interest dollars (which have already been taxed) will be taxed again at your current fed and state levels.
Another important item you need to check is to see what types of fees, if any, the plan charges. Many don't have any at all, but some have not only an origination fee (I've seen these as high as $100) and maintenance fees, typical amounts are $10 or $15 per year, charged proportionally every calender quarter.
Some have mentioned before, the most you can ever borrow from you account is $50K, though some companies set lower limits. You can only borrow from vested dollars, and some companies also restrict the sources of money you can borrow from. For example, some companies don't let you borrow from company match sourced dollars.
One last thing that was also already touched upon, if you leave the company and don't pay it back within a certain period of time, usually 90 days (some plans allow manually payments for former employees) or if you stop receiving a paycheck (out on disability) the loan may deem distribute (default) and you'll have to pay income taxes on the oustanding principal plus accrued interest from the last loan payment. In addition, if you are under 59 years and 6 months, you'll have to pay an additional 10% penalty. Depending on the size of the loan, keep in mind it can put you in a higher tax bracket.
Hope this helps.
Regarding rollovers to IRAs from 401k plans, while you get full freedom to invest in whatever you want in an IRA, keep in mind that many 401k plans don't have maintenance or exchange fees. Also, sometimes the class of shares of the mutual funds are better than what you can buy retail. Some plans have A shares, but many have Y (institutional) class shares of the same fund. This class has lower fees than the retail versions.
So there are some benefits to leaving your funds with your previous plan (or rolling into a new employer plan), if you don't mind the limited investment choices.
So there are some benefits to leaving your funds with your previous plan (or rolling into a new employer plan), if you don't mind the limited investment choices.