The Real Deal With a 401k Loan

You're in need of money. And you're thinking about getting a 401k loan. Before you decide on anything, let's find out first what a 401k loan is.

A 401k plan is mainly an employer sponsored plan that allows workers to put away some money for retirement. This money is invested while the current income taxes are deferred on the saved money and the interest it earned until it is withdrawn. The employee allows a part of his salary to be paid directly to the 401k account. This is called a contribution.

So what do you do to make sure that you're doing the right thing? Well, first off, make sure that the terms are clear to you. This goes for all business that you have to deal with. Make sure that you understand all the terms and conditions of a 401k loan. This type of loan is regarded as a last resort. So there are only a few reasons that are accepted when you are interested in taking a 401 loan.

One is for college tuition. This is to shoulder tuition fee or to pay for higher education. You can use this for your spouse, your children or yourself.

Another is a home mortgage. This would help prevent you from getting evicted from your home due to unpaid mortgage or bankruptcy.

You can also use the money to pay for medical expenses. This is considered a hardship loan.

If this would be the first home you're buying, then you can use the money as down payment on a new house

As with any other loan, there would be rules and terms to follow as well. This is to make sure that your retirement money is kept safe.

First there would definitely be a definition of how long the loan terms would be. Usually, it would be for five years or 60 months or less. If in case you are borrowing money for down payment on a house, the terms could be as long as 15 years.

Another is that there would be a loan minimum. It usually is at $1,000. Lesser amounts of loans should definitely not be considered or taken from a 401k account.

If there is a minimum, then there should be a maximum. It usually is 50% of the account balance or $50,000 whichever is less. But don't forget that there could be loan fees that would be charged for initiation fees or for annual service fees.

Lastly, you would need to repay the money. And it usually is evenly paid out over the loan term. The repayment should only be done through direct payroll deduction.

Now that you know the information, think about the reason why you're getting a 401k loan. If it is to pay your credit card bill, then don't do it. This loan shouldn't be used for present expenses. This is your retirement money you're dealing with. And you have to make sure that it remains intact for the time that you would finally retire. So think about it. Do you really want to get that 401k loan?

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