If you are in the situation whereby you are in need of money fast, your 401K may be looking pretty good right about now. After all, it is possible to take out a loan against your 401K. There are some rules and tips you need to remember, however. Here is some financial advice for a 401K loan.
The first point to make is: if at all possible, avoid taking out a loan against your retirement savings. Reason: this is your financial future, and there will come a day when you want every penny you can get. Remember the effects of compound interest: the larger the amount in your retirement account and the longer you keep it in there, the more money you will have when it comes time to retire.
Of course, you can choose to skip a loan and just withdraw money from your plan. However, the tax penalty you have to pay in this case will make this a very unattractive option.
Fortunately, taking out a loan against your retirement savings requires that you pay no tax penalty. However, there are limitations and restrictions for taking out this type of loan. The restrictions vary by plan, so check with your plan administrator. For most plans, the following are acceptable reasons to take out a loan against your 401K:
1. Pay for college
2. Pay your mortgage when facing possible eviction or other hardship
3. Pay medical expenses
4. You are purchasing a home for the first time
Here are some of the regulations and constraints you will most likely face when considering this type of loan:
1. There will be a minimum loan amount: usually around a thousand dollars
2. Your loan will have a prescribed length at the outset, such as 5 years or less
3. There is a maximum you can borrow, which is usually around half of your account's value at the time of the loan
4. Depending upon your plan, you may incur loan fees for taking out a 401K loan.
If you are considering taking out this type of loan, make sure you have exhausted all of your other options first. If you have poor credit but need money fast, you may want to consider a short term personal loan instead.
