• Home
  • About Us
    • Our Team
    • Our Mission
    • Testimonials
    • Service Areas
  • Services
    • Tax Services
    • Audit & Assurance
    • Accounting
    • Litigation Support
    • Valuation Advisory
    • Forensic Accounting
    • Business Consulting
  • Resources
    • Client Center
    • Online Tools
    • Important Sites
    • Timely Opportunities
  • MBA News
  • Careers
    • Senior Tax Accountant
    • Tax Manager
    • Bookkeeper / Accountant
  • Contact Us
  • Facebook
  • Google+
  • Linkedin
  • Savvy
  • Twitter
  • Home
  • About Us
    • Our Team
    • Our Mission
    • Testimonials
    • Service Areas
  • Services
    • Tax Services
    • Audit & Assurance
    • Accounting
    • Litigation Support
    • Valuation Advisory
    • Forensic Accounting
    • Business Consulting
  • Resources
    • Client Center
    • Online Tools
    • Important Sites
    • Timely Opportunities
  • MBA News
  • Careers
    • Senior Tax Accountant
    • Tax Manager
    • Bookkeeper / Accountant
  • Contact Us

Blog Post

Are you sure you want to take that 401(k) loan?

03 Aug 2016
Comment are off
MBA Site Administrator
Loan in St Petersburg Florida

With summer headed toward its inevitable close, you may be tempted to splurge on a pricey “last hurrah” trip. Or perhaps you’d like to buy a brand new convertible to feel the warm breeze in your hair. Whatever the temptation may be, if you’ve pondered dipping into your 401(k) account for the money, make sure you’re aware of the consequences before you take out the loan.

Pros and cons

Many 401(k) plans allow participants to borrow as much as 50% of their vested account balances, up to $50,000. These loans are attractive because:

  • They’re easy to get (no income or credit score requirements),
  • There’s minimal paperwork,
  • Interest rates are low, and
  • You pay interest back into your 401(k) rather than to a bank.

Yet, despite their appeal, 401(k) loans present significant risks. Although you pay the interest to yourself, you lose the benefits of tax-deferred compounding on the money you borrow.

You may have to reduce or eliminate 401(k) contributions during the loan term, either because you can’t afford to contribute or because your plan prohibits contributions while a loan is outstanding. Either way, you lose any future earnings and employer matches you would have enjoyed on those contributions.

Loans, unless used for a personal residence, must be repaid within five years. Generally, the loan terms must include level amortization, which consists of principal and interest, and payments must be made no less frequently than quarterly.

Additionally, if you’re laid off, you’ll have to pay the outstanding balance quickly — typically within 30 to 90 days. Otherwise, the amount you owe will be treated as a distribution subject to income taxes and, if you’re under age 59½, a 10% early withdrawal penalty.

Hardship withdrawals

If you need the money for emergency purposes, rather than recreational ones, determine whether your plan offers a hardship withdrawal. Some plans allow these to pay certain expenses related to medical care, college, funerals and home ownership — such as first-time home purchase costs and expenses necessary to avoid eviction or mortgage foreclosure.

Even if your plan allows such withdrawals, you may have to show that you’ve exhausted all other resources. Also, the amounts you withdraw will be subject to income taxes and, except for certain medical expenses or if you’re over age 59½, a 10% early withdrawal penalty.

Like plan loans, hardship withdrawals are costly. In addition to owing taxes and possibly penalties, you lose future tax-deferred earnings on the withdrawn amounts. But, unlike a loan, hardship withdrawals need not be paid back. And you won’t risk any unpleasant tax surprises should you lose your job.

The right move

Generally, you should borrow or take hardship withdrawals from a 401(k) only in emergencies or when no other financing options exist (and your job is secure). For help deciding whether such a loan would be right for you, please call us.

© 2016

About the Author
McClanathan, Burg & Associates, LLC. is a full service accounting firm. Our team members provide services including: Tax, Audit, Assurance and Accounting, Estate and Trust, Forensic Accounting, Litigation Support and Business Valuation.

Social Share

  • google-share

Search

RECENT NEWS

  • IRS Extends the Tax Filing and Paying Deadline for Individuals
  • Do you know the tax impact of your collectibles?
  • Making 2017 retirement plan contributions in 2018
  • When an elderly parent might qualify as your dependent
  • AMT Calculations: It’s Showtime

Categories

  • MBA Events
  • MBA News
  • Opinion & Editorial
  • Resources & Tips

Archives

  • March 2021
  • February 2018
  • January 2018
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • November 2013

Social Media

Facebook
Linked In
SavvyCard
Twitter

“Best
Congratulations to this year's honored business!
Featured in the Tampa Bay Times.
Click here to view my profile >>

Categories

  • MBA Events
  • MBA News

Archives

Sign Up For Newsletter

First Name:
Last Name:
Email Address (required):
Company:
Phone Number:
© 2014 McClanathan, Burg & Associates, LLC | Website Design by ThinkTankConnect.com

Send to Mobile

Text or Email McClanathan, Burg & Associates online business card to your mobile device using the form below
From the card you will be able to:
  • Get turn by turn directions to the company's office
  • Access a visual company directory of employee cards
  • Call, email or text the company
  • Share/Refer the company to others
  • Save the card to your phone's home screen for future access