Summary: If you have money saved in a 401K retirement plan, you may be able to take out a loan on that money. However, if you are less than 59 1/2 years old, you will pay a penalty on the amount plus taxes. Avoid taking out a loan from your 401K retirement plan to pay down credit card debt. If your 401K retirement plan is canceled, avoid touching the cash - roll it right over into an IRA instead. When transferring 401K retirement plans from one employer to another, you have to pay back any 401K loans - otherwise they are considered a distribution and you will owe taxes along with a penalty.
Q: I WANT TO MAKE A HARDSHIP WITHDRAWAL FROM MY 401K AT WORK TO HELP FOR A DOWN-PAYMENT FOR A HOUSE/CONDO. PLEASE ADVISE IF THERE IS A LIMITATION AS TO HOW MUCH I CAN WITHDRAW, AND IF THERE IS A PENALTY FOR WITHDRAWING THE MONEY? ALSO DO I HAVE TO PAY A TAX FOR THE WITHDRAWAL?
A: You have to check with your 401(k) plan administrator to find out if (1) your plan permits you to borrow from it for any reason, including the purchase of a home and (2) how much you can withdraw.
If you cannot borrow from the account, you may "cash out." If you are less than 59 1/2, you will owe a 10% penalty on the amount plus whatever regular income taxes are owed in your marginal bracket.
So start with your plan administrator and work from there. By the way, if you're borrowing funds for your down payment, I urge you to consider a 100% or 103% loan, like the ones offered by Countrywide Home Loans (www.countrywide.com). I'd much rather see you pay private mortgage insurance than borrow from your 401(k).
Q:Our company just started the 401k loan program. It is all new to me but the interest rate is low. We have about 15,000 in credit card debt. What are the pros and cons of these loans? We just want to get out of credit card use altogether.
A: You can't borrow from a 401(k) program until you have 401(k) savings. In essence, you're borrowing from yourself.
If you can't manage your debt, you will need to take some dramatic steps, including transferring the balances to a low-interest rate card and pumping the monthly "savings" into prepaying the debt; paying your monthly minimum twice a month; getting a second part-time job and devoting all of your earnings toward paying down the debt; and, refinancing your home loan (or getting a home equity loan) to trade non-deductible debt for deductible debt at a lower interest rate.
I suggest you seek the advice of a non-profit credit counseling agency like CCCS. You can contact the National Foundation for Consumer Credit (www.nfcc.org) for more help and a referral to a CCCS office near you.
Q: The company that I have been working for has been acquired by another one. I was contributing to a 401k plan which has been canceled. I also own a two bed/bath room house which I think its value is $100,000.00 The house mortgage balance is $75,000. I'd like to buy a bigger house of no more than $140,000.00 The new company does not have a 401k plan. My 401k balance is $48,000.00 less a $4,043.00 loan. I have the option to transfer the balance less 20% tax deduction to an IRA or to have a lump sum payable to me, which would be less 30% in tax deduction and the loan balance (I would receive about $30,000.00). My question is what is best for me: 1. transfer the 401k balance to an IRA or 2. Use the 401k plan money (about $30,000.00 ) and the house equity (about $25,000.00) for a downpayment (in order to have about the same monthly mortgage payment) for a bigger house taking advantage of low interest rates. Currently my mortgage rate is 7.5%
A: I think you should sell your home, pay off your 401(k) loan, and then use the rest to buy a new home. If you can't afford a larger mortgage without using your 401(k) cash, then you should stay where you are. Also, I'd rollover your 401(k) to an IRA, but don't touch the cash. Then, you won't have to pay any withholding.
Q: I am considering a job offer that has a greater long-term potential for advancement. I have a 401K loan (residential) with my current employer that has a payoff around $8000. I understand the tax implications of not paying it off, but paying this loan in full within 30 days is near impossible. Any suggestions? I have read about using a "introductory rate" credit card for a short term and setting up a new 401K loan with my new employer after rolling over my 401K balance to their plan. This is the only realistic plan I can see right now.
I would hate to turn down a long-term opportunity due to a short-term dilemma like an $8000 debt. I am 32 years old and have no other debt than a mortgage and one car note. My 401K account and Roth IRA Total around $70,000 so I think I am in good shape otherwise. Any thoughts on this matter?
A: If you don't pay back the loan, it will be considered a distribution and you will owe income taxes as well as a penalty. You may end up paying close to $4,000 for this debt.
I don't know when you bought your home, but you may have some equity that you can tap. Consider getting a home equity loan to pay back the $8,000 (or as much of it as you can manage).
If you want to transfer your 401(k) to the new company, that may be fine. But it will not change the status of your loan.
Jan. 1, 2005
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Comments
Apple Sloan says
I took out a loan against my 401k. I am not longer an employee of that firm. I recently requested and received a distribution. The employer deducted the amount of my outstanding loan out of my distribution. Was the employer allowed to do this without my authorization. Did I have the option of having the loan treated as a distribution and then suffering the tax consequences in the end. I ask because the case is needed to care for my sick mother who has no health insurance. Given the choice between egregious tax consequences and the death of my mother, I choose the former.
Apple Sloan says
Revised question: I took out a loan against my 401k a year or so ago and switched jobs. I recently requested and received a distribution. My former employer deducted the amount of my outstanding loan out of my distribution. Was the employer allowed to do this without my authorization or prior knowledge? Did I have the option receiving the entire amount of my 401k with no loan proceeds deducted, and then having the loan default and then treated as a distriubtion on next year's taxes? I ask because the additional cash is needed to care for my sick mother who has no health insurance. Given the choice between egregious tax consequences and the death of my mother, I choose the former.
Ilyce says
When you take out a loan against your 401(k), it must be paid back within 60 days if you leave your job for any reason. Since you left your job with the open loan, and then requested a distribution, the employer deducted the amount of your outstanding loan. I'm sure that this was fully disclosed to you in your 401(k) paperwork, but you may not have read it or understood the rules for borrowing against your 401(k). I'm sorry that this happened to you. I can see how it would have helped to have been able to take the loan as a distribution in the following year. Now it seems that you'll have to pay the taxes as well as care for your sick mom. (I hope she recovers soon.) Thanks for your comment. Ilyce