Sometimes you find yourself needing some money. Unexpected events such as a car breakdown can put a damper on your budget no matter how well you plan. In situations where you need money and need it quick, you can look into borrowing money from your 401k only after your emergency fund, and all other options are ruled out. Typically, when someone makes a 401k plan, they do not expect to take any money out until it has grown and matured when they are retired.
But life does not always go the way we hope, and sometimes we need to delve into whatever source of money we can find, and sometimes that means taking money from our 401k. This has been thought of, so most 401k plans will have that type of loan available.
While taking a loan from your 401k can often make the difference between paying off a bill and falling further into debt, there are risks involved. If you do not handle the loan carefully, you can not only run the risk of having to pay much more down the road, but you also run the risk of ruining your 401k and costing you thousands in missed earnings within the 401k itself.
Not all 401k plans are the same, and so there is no universal method for getting money out of them. You need to check into the specific plan you have and determine what restrictions apply when borrowing money from your 401k. Most plans will require that you borrow a minimum amount of money, usually anywhere from five hundred to a thousand dollars. They often will also have a maximum amount that you can borrow, usually around fifty thousand dollars. However, again, every plan is different, so you will need to look and see whether this applies to you or not.
While taking money from your 401k plan may be a lifesaver, you may not be able to. While most plans are different, there are usually similarities in the form of requirements. Most plans will not let you borrow money from them unless you can meet the requirements they put in place. If you do not meet these requirements, they will not lend you the money. So, this is another reason why you should look over your plan carefully and read the fine print to educate yourself properly.
Like most loans, a loan from your 401k will have a set repayment plan that you will have to adhere to. This can be anywhere from five to 15 years, depending on the type of loan you took out and the type of plan you are on. The nice thing about borrowing money from your 401k is that, while you, of course, have to pay it back, the interest rates are fairly low and are put back into your 401k itself.
While taking a loan from your 401k is a good option, there are some additional fees that you may have to pay. Such as yearly fees or fees if you miss a payment. If your company has someone who manages 401k plans, you should talk to them if you have any questions. For more on 401k loans and how they can affect your retirement income, visit https://kgmeyerpc.com/401k-retirement-loans-2/.
401k loans should not be considered unless you are in a dire situation. These loans, while appearing innocent, really can cost you tens of thousands in lost income within your 401k over the years it is earning and compounding on your behalf. For more information on 401k loans, get my short book at https://personalfinancemadesimple.com/collections/frontpage/products/401k-retirement-loans-loans-that-cost-you-more-than-you-think.
And when in doubt, consider consulting with a fee-only Registered Financial Consultant who is also a fiduciary. I am based in Nashville, Tennessee but the ability to assist you no matter where you are located within the United States.
