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Basic 401k Info

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Using Your 401k Plan for Investment

401k Loans

Another benefit that is available with the approval of your employer is the ability to take loans out of your 401k. If you need to make an investment or some kind of payment that is either not a traditional hardship or does not meet the criteria for hardship as defined by your employer as plan sponsor, you may be able to withdraw some of the money that you have already invested in your 401k. Hardships can include:

When taking a loan out from your 401k, you will simply withdraw the amount necessary. You can only repay the amount of the loan with your after-tax income, and there will be interest on the loan which will be pre-arranged by your employer. The interest you pay on the loan will go towards the balance of the loan, so you may end up with more money in your 401k after all of your loan payments are made.

Penalties

Normally, withdrawals from 401k’s are penalized by making them subject to federal income tax as well as a 10% excise tax. However, if the loan taken out of your 401k is fully paid and on time, you will not need to make these additional tax payments. Once you have defaulted on a single loan payment, the entire sum of your loan withdrawal becomes a normal withdrawal subject to taxes.

Most 401k loans are engineered to last no more than five years. While it might differ from employer to employer, this is the standard length with no plans being longer. The only exception, if allowed at all by the sponsor is if you are using the loan to purchase your primary residence.

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