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Retirement Investing - Borrowing From Your 401k - Part 3

November 2nd, 2006 by Papabear

So far we’ve discussed 4 reasons borrowing from your 401k account might be a good idea and 2 reasons to reconsider. Today we’ll finish out the 8 things to consider with 2 more reasons you might not want to borrow:

7. A home equity loan may be a better solution from your particular situation. Most states, with the notable exception of Texas, where I live, have made setting up a home equity line of credit simple. If you have enough equity in your house, and you have a good credit rating, you should consider a home equity loan. Unlike a loan from your retirement account, the interest you pay on a home equity loan is usually tax deductible.

8. There may also be special deals available that are better than a loan from your 401k account or a home equity loan. For example, at the time this is being written, several car companies are offering 0% financing for up to 60 months. If you qualify, this is a much better way to finance a new car that borrowing from your 401k account or using a home equity line of credit to buy a new car.

In conclusion, everyone’s situation is a little different. When you’re talking about $1,000’s of dollars and the impact of tax laws, it’s always best to get professional advice from an accountant or tax attorney. It may cost you $100 to $200 for a simple consultation, but it will be money well spent to find out what’s right for you and your situation.

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    Retirement Investing - Borrowing From Your 401k - Part 2

    November 1st, 2006 by Papabear

    Let’s see – 4 good reasons to borrow from your retirement account. Here are 2 good reasons not to borrow from your 401k account:

    5. As the old saying goes “some restrictions apply.” Our friends in Congress and the IRS don’t want this to be too good a deal, even if it’s our own money. After all, Congress thinks they did us a really big favor with 401k accounts by making it easier to save for retirement. Maybe they did, but like many good deals, this one comes with strings attached. First there’s the $50,000 limit. Even if your have $200,000 in your 401k account, and the general rule is you can borrow up to 50% of your 401k account balance, you are limited to borrowing $50,000 at any one time. In addition most plans usually limit the number of loans you can have at any one time to 1 or 2. For example, if you borrow 50% of your 401k account balance of $50,000 on a 5 year loan, and the $25,000 left in your account triples over the next 3 years from savings and increases in the value of the investment to $75,000, you cannot borrow another $37,500. First you are limited to a total outstanding balance of $50,000. Second, if your plan restricts you to 1 loan at a time, you will not be about the borrow 50% of the new value in your account until the first loan is paid off. Even if your plan allows for 2 loans at a time, most plans have another restriction that says the amount you can borrow on the second loan will be reduced by the highest outstanding balance on the first loan during the previous 12 months.

    6. If you switch to a new company, you may have to pay off your loan immediately. In many cases, this can be avoided by rolling over your 401k account, but if you can’t do that, the outstanding balance of your loan will be considered an “early distribution” from you retirement savings account and will be deducted from what you have available. You won’t have to pay the money back, but you will have to pay taxes on the balance of the loan as ordinary income. And if you’re less than 59 ½ yeas old, you will also have to pay a 10% early withdrawal penalty.

    Thinking about paying extra taxes is stressful, so we’ll end here today. Tomorrow, I’ll post 2 other reasons to think twice about borrowing against your retirement account.

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    Retirement Investing - Borrowing From Your 401k - Part 1

    October 31st, 2006 by Papabear

    For most people saving for retirement, our retirement savings account, whether it’s in a 401k account or an Individual Retirement Account or IRA, is our biggest or second biggest asset, next to our home. And unlike the equity in our home, the money in our 401k account or IRA is exactly that – our money. Liquid Assets. It’s tangible and does not go up and down with the value of the real estate market.

    Most of us have our 401k account or IRA in a plan that allows us to borrow a portion of the money. This can be a great idea and a ready source of money, but there are positives and negatives to borrowing from your retirement savings account. Here’s a list of 8 things to consider before taking out a loan from your retirement account. Since the list is long, I’ll post it over 4 days. Let’s start with 4 good reasons:

    1. Most plans allow you to borrow up to 50% of the vested balance in your account, up to $50,000.

    2. Interest rates are usually competitive and are often lower than your could get from a bank on a signature loan. Borrowing your own money is not technically a signature loan, because you are pledging the money in the account to back up the loan, but because it’s so quick and simple, it’s more like getting a signature loan on a note at the bank than the longer process of pledging assets for a loan guarantee.

    3. Because your are borrowing your own money, you don’t have to “qualify” for a loan, like you would for a signature or other loan from a bank, so you don’t have to worry about your credit rating.

    4. Since you’re borrowing your own money, the interest you pay on the loan goes back into your own pocket and not the banker’s, since it goes into your account. If your 401k account is primarily invested in your company stock or even in a mutual fund that has a low or falling rate of return at the moment, you might actually earn more money from the interest you pay on your loan, even if it’s only 5 or 6%.

    So – 4 good reasons to consider borrowing from your retirement account when you need some extra money. Tomorrow, we’ll look at 2 reasons you might want to reconsider.

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