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Posted: 3/15/2002 10:06:01 PM EDT
How do these bad boys work?
Link Posted: 3/15/2002 10:19:30 PM EDT
In the plan I am enrolled in, you decide how much you want to borrow and how long you want to take to pay it back. You are charged interest but it goes into your 401k account. The interest rate varies depending on the length of payback. You can usually borrow up to half the balance in your account to a max of $50,000. The payments come right out of your paycheck. 3 loans is the most you can have at one time in my plan. In the plan I'm in, you call an automated system, follow the instructions, and a check is mailed out within about 2 days.
Link Posted: 3/15/2002 11:15:56 PM EDT
God forbid if you should lose your job, I believe the balance of the loan is due immediately. 401k loans should be regarded as a last resort.
Link Posted: 3/16/2002 3:05:47 AM EDT
Originally Posted By mattja: God forbid if you should lose your job, I believe the balance of the loan is due immediately. 401k loans should be regarded as a last resort.
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No, if you lose your job and do not pay it back then it is just considered taxable income for that year and you're done with it. You are actually loaning yourself money, so you can't default. Plus would you rather pay someone else the interest or pay it to yourself? 401k loans have their place.
Link Posted: 3/16/2002 5:09:16 AM EDT
Unfortunately at my place of work 401(k) loans are not offered, only hardship withdrawals.
Link Posted: 3/16/2002 5:14:09 AM EDT
Originally Posted By Ponyboy:
Originally Posted By mattja: God forbid if you should lose your job, I believe the balance of the loan is due immediately. 401k loans should be regarded as a last resort.
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No, if you lose your job and do not pay it back then it is just considered taxable income for that year and you're done with it. You are actually loaning yourself money, so you can't default. Plus would you rather pay someone else the interest or pay it to yourself? 401k loans have their place.
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Don't you also have to pay the 10% early withdrawl penalty on the remaining balance on your loan and on your account?
Link Posted: 3/16/2002 5:15:45 AM EDT
Originally Posted By Ponyboy: No, if you lose your job and do not pay it back then it is just considered taxable income for that year and you're done with it.
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You also subject yourself to the IRS 10% early withdrawal penalty.
Link Posted: 3/16/2002 5:39:52 AM EDT
I'm the plan administrator for my company's 401k plan. We've had the plan for about 4 years now. We started the plan with a "loan" provision and a "hardship withdrawal" provision. We have since dropped the loan provision because the 401k RETIREMENT plan became a LOAN program. Employees were taking out loans for camping trailers, four wheelers, vacations, trips to Disneyland etc. The purpose of the 401k is so you can eventually retire. It's not to pay for fixing your car or buying a boat. The 401k plan wasn't supposed to be considered another savings account for personal use. I do know that it's the employee's money. However, they can get it for hardship withdrawals for things such as uninsured medical bills, down payment on a house, foreclosure prevention and tuition. Other than that, you shouldn't touch the money. Use a regular bank if you need loan. Our company matches anywhere from 40% to 80% a year. Our president said they could either have the loan provision or employer matching. He didn't want company matching money going for trips to Vegas. We dropped the loan provision and kept employer matching. If most people are getting loans, there's not much point in matching employee contributions or providing a RETIREMENT plan for that matter. I just don't think it's a good idea to get a loan unless you were going to use it to start your own business or something. Just remember what the 401k is for. If you really need money badly, just get the hardship withdrawal and you don't have to pay it back.
Link Posted: 3/16/2002 5:53:15 AM EDT
Good information listed above. I also generally agree with the previous post that it is not a good idea to use these 401K loans except in certain circumstances. I personally participated in one such loan back when I purchased my first home. It was the best option at the time and worked out perfectly. The beauty of these loans is that you are essentially borrowing from yourself, the repayment is generally automatic (payroll deduction) and if you loose your employment you simply take the balance hit on your 401K account and possibly the 10% penalty on the amount not repaid. Even then the penalty may be less than you would have paid in interest on a commercial loan (something I did not see mentioned above) All in all, IMO, a good deal for a responsible person as an alternative to a commercial bank loan. Excercise common sense when considering taking out any loan, only borrow if you have to and only for serious obligations or opportunities. Also never take more in loan than you need at the time. Best regards :)
Link Posted: 3/16/2002 5:58:49 AM EDT
Another little know fact about 401k loans is that the money you pay it back with isn't tax defered. You are paying taxes at the current rate only to be taxed again when you withdraw the money at retirement age. Just something else to think about. Steve L. btw- why do employers care what people do with their matching funds......its a perk.....let them use it as a perk jeeze. Its not like the employer gives many perks, and its not like upper management doesn't get shitloads in stock options, free shares, bonuses, etc. Want to waste money earmarked for your retirement? you should be able to.
Link Posted: 3/16/2002 8:45:32 AM EDT
So you're saying that taking out a loan for a 50 BMG is a bad idea [:(]. What a bunch of party poopers! [:)]
Link Posted: 3/16/2002 9:08:20 AM EDT
It's generally a very bad idea to borrow from your 401k for the following reasons that have not already been mentioned. 1. You will not have the money available if you truly have a hardship and really need the money. 2. The funds you borrow will not have a tax deferred investment gain. That is the power of a 401k plan along with a company match.
Link Posted: 3/16/2002 10:55:26 AM EDT
In our plan we allow loans & I've seen them asked for all sorts of things. Luckily for my employees, the company is very stable & so are their jobs. We allow loans up to 50% & we match employee contributions 100% up to $2500.00 per year. Some have found if they have money going into a 2% money market their loan interest of 6-8% turns out to be a way to improve their return. A downside on some newer smaller plans is with the load charged upon the plan by investment firm. Once take funds you've paid load on out by way of a loan you have to repay the load again as you make loan payments. Once a 401k plan has over a million in the plan more of these loads disappear. Have to check every plan to see what is allowed; % of balance you can borrow, what you can borrow for, length etc. A reason employers care about what the employees do is the fact the plan is supposed to be used for retirement investments and taking loans out for some toy isn't helping to invest for the future. It decreases the amount of money that can be invested at better returns, to offset the shitty ones paid by forced social security contributions.
Link Posted: 3/16/2002 12:04:36 PM EDT
Schapman, Don't touch your 401K. You will only regret it later. In fact my advice to everyone would be to max that baby out unless you are in to investing on your own and are good at it. My 2 cents.
Link Posted: 3/16/2002 4:28:58 PM EDT
How old do I have to be before I get the money in the account?
Link Posted: 3/16/2002 5:05:33 PM EDT
Schapman, I own my business and we have a 401K. I felt the loan was one of the most important features because it allows employees to feel like they are in control of their money. All of the advice above is good. It is good personal discipline to leave your 401k alone. It is even better to max it at 15% (higher if you are above 50 now? New clause put in place this year for older people who need to make up ground before they retire) On the other hand, how long before the Govt. stops new purchases of 50 cal rifles? A good compromise. Buy a low end 50 cal. Save half the money yourself and then reward yourslef and borrow the rest but buy it before presidential election in 2004? If you need more advice, my wife is an actuary who specializes in pensions, lets say for $200 an hour she can give you lots of advice. Here is the .02 version of what she would say: "Jesus Chrsit, you are going to borrow from your 401k money to buy another gun? Don't you have enough guns? What would you use this gun for? Why is it so expensive compared to your other squirrel rifles? Are you going to sell the gun if you lose your job and you have to pay the taxes on the loan? You only live once, you don't really need a 50 cal, lots of people die broke every day, I say join the club and buy the damn thing!
Link Posted: 3/16/2002 5:49:53 PM EDT
Originally Posted By schapman43: How old do I have to be before I get the money in the account?
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You can start withdrawing at 59 and 1/2 if I remember correctly. You have to have withdrawn everything by a certain age also. You pay taxes on the amount you withdraw at the tax rates current at time of withdrawal. The best deal out there by far is a Roth IRA. You invest after tax dollars and it grows without any tax on the capital gains. You can invest up to $2500/yr. I would say to do both but the Roth? That is one sweet deal. There is also the standard IRA and you can do that as well. I agree with the advice to buy the .50 but find another way. Don't touch your retirement except in true case of hardship.
Link Posted: 3/16/2002 6:12:26 PM EDT
Here's what I do: I put in the maximum allowed. My company matches a little bit of it. I pretend it does not exist, and that I can never get to it, unless it is needed desparately (which is the only way I think I am allowed to get at it anyway, unless I change jobs). Basically, at the current moment-- it does not exist, its a "retirement tax" that I pay during each pay period.
Link Posted: 3/16/2002 6:17:45 PM EDT
Originally Posted By Energizer: Here's what I do: I put in the maximum allowed. My company matches a little bit of it. I pretend it does not exist, and that I can never get to it, unless it is needed desparately (which is the only way I think I am allowed to get at it anyway, unless I change jobs). Basically, at the current moment-- it does not exist, its a "retirement tax" that I pay during each pay period.
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Thats what I do too. I put in 12% and the govt throws 5% on top of that. 17% Yeah baby.
Link Posted: 3/17/2002 10:22:56 PM EDT
While I agree that maxing out your contribution to 401k is the optimum idea, most financial advisers say that it is most important to have a cash reserve first. Even if it means losing that company match for awhile, it is very important to have enough cash in the bank to pay 3 months worth of bills. Here is an idea if you can't contribute the max; when you get a raise, say 3%, raise your 401k contribution by 1%. That way you increase your contribution with money that you aren't used to bringing home anyway.
Link Posted: 3/18/2002 3:36:20 AM EDT
Originally Posted By Ponyboy:
Originally Posted By mattja: God forbid if you should lose your job, I believe the balance of the loan is due immediately. 401k loans should be regarded as a last resort.
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No, if you lose your job and do not pay it back then it is just considered taxable income for that year and you're done with it. You are actually loaning yourself money, so you can't default. Plus would you rather pay someone else the interest or pay it to yourself? 401k loans have their place.
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Is that the law or is it based on the plan you have? I read in a couple of investment publications that the balance is due immediately.
Link Posted: 3/18/2002 6:51:52 AM EDT
Originally Posted By mattja:
Originally Posted By Ponyboy:
Originally Posted By mattja: God forbid if you should lose your job, I believe the balance of the loan is due immediately. 401k loans should be regarded as a last resort.
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No, if you lose your job and do not pay it back then it is just considered taxable income for that year and you're done with it. You are actually loaning yourself money, so you can't default. Plus would you rather pay someone else the interest or pay it to yourself? 401k loans have their place.
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Is that the law or is it based on the plan you have? I read in a couple of investment publications that the balance is due immediately.
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If you think about it, the balance is due immediately, then you pay a 10% penalty, plus taxes on it, then you get it right back. So basically you aren't really paying it back, you are paying your taxes at the end of the year, and your 10% penalty on the balance, which they will probably take right out of your current 401K balance, since you can only borrow up to about 1/2 of your balance to begin with...
Link Posted: 3/18/2002 9:00:59 AM EDT
Originally Posted By Luavul: While I agree that maxing out your contribution to 401k is the optimum idea, most financial advisers say that it is most important to have a cash reserve first. Even if it means losing that company match for awhile, it is very important to have enough cash in the bank to pay 3 months worth of bills. Here is an idea if you can't contribute the max; when you get a raise, say 3%, raise your 401k contribution by 1%. That way you increase your contribution with money that you aren't used to bringing home anyway.
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That's why I also budget my money so I can save some of it, as well as max out my 401K contributions. Everyone should have a small stash to cover a couple months of bills, or to purchase a large item.
Link Posted: 3/18/2002 9:46:55 AM EDT
Originally Posted By Luavul: While I agree that maxing out your contribution to 401k is the optimum idea, most financial advisers say that it is most important to have a cash reserve first. Even if it means losing that company match for awhile, it is very important to have enough cash in the bank to pay 3 months worth of bills.....
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The 3 month cash reserve is for an emergency cushion & your 401k could be viewed as that if in an emergency. Still a good idea to try to built that up too while maxing your 401k. While you may not qualify the new changes for this year allow those 50 & older some "catch up" provisions. The catch-up contribution provision provides that, effective for plan years starting on or after January 1, 2002, 401k plans may permit participants age 50 and over to make additional "catch-up" contributions. The contribution will be $1,000 (over the $11,000 limit) in 2002, then increased each year by $1,000 until $5,000 in 2006, and then indexed in $500 increments.
Link Posted: 3/18/2002 9:58:25 AM EDT
Some additional info: [url]http://www.401k.com/401k/about/loans.htm[/url]
Link Posted: 3/18/2002 8:14:19 PM EDT
Under the plan I am in, you have 90 days to repay the loan if you lose your job.
Link Posted: 3/19/2002 5:05:08 AM EDT
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