Why Taking a 401K Loan Can Be Advantageous?

If you cannot get approved for a home loan or personal loan, you might consider a loan from your 401K. While many financial planners may be against the idea of a 401K loan, it may make sense in some instances.

Unfortunately, we sometimes can get ourselves into a financial bind. Maybe you recently lost a lawsuit, need to pay a enormous income tax bill or defend yourself in an IRS audit case. Whatever the reason, you may not have the savings outside of a 401K to meet these obligations, and furthermore, these expenses would not be eligible for you to qualify for a hardship withdraw from your 401K, well, at least under these circumstances.

If you find yourself in this situation, you might consider taking a loan from your 401K. Remember that some 401K plans only allow you to take one loan at a time. Therefore, you must pay off your current 401K loan before applying for another one. If you currently do not have an outstanding 401K loan, as a general rule, you may be able to take a loan from your 401K in the amount of the lesser of $50,000 or 50% of the account value. In most cases, a $50 processing fee also will apply.

Unlike a personal loan, there is no credit check when you apply for a 401K loan. Additionally, the paperwork is fairly simple. Depending on your 401K plan, the paperwork could be as few as a couple of pages. If you meet the conditions to be eligible for a 401K loan, your loan application should be approved. However before you choose to apply for a 401K loan, you probably should speak to a financial planner or tax accountant. There may be a better way to deal with the current financial dilemma which you are facing. Remember that you must pay off the 401K loan prior to leaving your current employer; otherwise, you might be subject to an early distribution penalty of 10% and have 20% of the distribution amount withheld for federal income taxes, unless you are under the age of 59 ½ ( also age 55 and separated from your employer; there are a few more exceptions that could apply).

*Disclaimer: This article does not constitute financial advice. Always consult a tax advisor or financial advisor when making investment decisions.

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