Borrowing Against Your 401k
Have you ever wondered how to save for your retirement? Does the thought of getting a loan on retirement savings hit your mind especially at the time of dire need, but you just do not have the required facts on how it all works? If your answers to the above questions were ‘YES’, then we have some facts for you.
To start us off, it’s important to know that 401k makes the process of saving for your loan very easy. On top of that, the 401k process allows you to obtain a loan against your retirement savings. However, you cannot ignorantly opt for this loan without real time information on how it actually works.
Loan Limits
The amount you can borrow is based on the amount of 401k savings you have.
You can be given up to half of your savings. This means that if you have savings amounting to $60,000, then you can get a loan amounting up to $30,000. However, in an event that half of your savings adds up to more than $50,000, then you can only be given a loan of up to $50,000. What am I trying to tell you in this case? Take a situation in which someone has savings of $300,000. This means that half of the individual’s savings add up to $150,000. They cannot be given a loan amount of that value. The highest amount the person can be given is $50,000.
Repayment Period
One is expected to pay back the loan within a period of 5 years from the day they receive it. However, a longer period is granted to those who take the loan to build a home. A unique scenario presents itself in case you lose your job before you fully repay back the loan. You are expected to fully repay back the loan within a 90-day period. If you cannot repay within that period, the loans will attract a tax and on top of that a 10% penalty is charged on it by the Internal Revenue Service for those below the age bracket of 59 and a half years.
Repayment Procedure
The amount payable on the principal as well as the interest is automatically deducted from your bank account on a quarterly basis.
Other Facts you need to know
A ‘hardship withdrawal’ is also allowed. This is an amount that one is allowed to borrow from while still employed. However, you have to give proof that they do not have any other avenue to borrow, such as borrowing from savings or the ability to get money from a personal lender. Your employer will expect you to present an official request with documents to act as evidence of your level of need showing actually duly qualify to receive this amount. You are likely to qualify if the amount is required for expenditures such as an urgent need to pay medical bills. You want to buy your own home, money towards repairs of your damaged home, an event you are about to be evicted from your home due to non-payment among other urgent issues that require immediate money solutions.
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