401K Loans: Pros & Cons

Michael Ruger - Greenbush Financial Group

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There are a number of pros and cons associated with taking a loan from your 401K plan. There are definitely situations where taking a 401(k) loan makes sense but there are also number of situations where it should be avoided. Before taking a loan from your 401(k), you should understand:
• How 401(k) loans work
• How much you are allowed to borrow
• Duration of the loans
• What is the interest rate that is charged
• How the loans are paid back to your 401(k) account
• Penalties and taxes on the loan balance if you are laid off or resign
• How it will impact your retirement
Sometimes Taking A 401(k) Loan Makes Sense
People are often surprised when I say “taking a 401(k) loan could be the right move”. Most people think a financial planner would advise NEVER touch your retirement accounts for any reasons. However, it really depends on what you are using the 401(k) loan for. There are a number of scenarios that I have encountered with 401(k) plan participants where taking a loan has made sense including the following:
• Need capital to start a business (caution with this one)
• Resolve a short-term cash crunch
• Down payment on a house
• Payoff high interest rate credit cards
• Unexpected health expenses or financial emergency
I will go into more detail regarding each of these scenarios but let’s do a quick run through of how 401(k) loans work.
Contact Michael Ruger with Questions: 518-477-6686 or mruger@greenbushfinancial.com
Visit our website: www.greenbushfinancial.com/
Subscribe to our channel for more financial planning tips: / @greenbushfinancialgroup
#401k #loans #greenbushfinancial #financialplanning

Опубликовано:

6 авг 2024

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Комментарии : 2

@gacontkazfir1690 Год назад

I like your video and it has many things to keep in mind. I also had thought we would pay double taxes. But when you think about the function of the money you can see that double taxes are paid on the interest only. When the money goes into the 401k without tax, it becomes savings by investing. When you take it back out it becomes spending by wages. When you take the loan it is like you had delayed your wages. You use the money anyway you want just like your regular taxable wages. When you pay it back the original money becomes savings again. But because you used that money just like your regular wages, taxes need to be paid. So you are paying taxes on what you spent not on what you are saving. Now the interest you pay is double taxed because this is new money. This amount is not part of the loan, therefore interest is not part of the money that became wages.

@jamesbowman1767 Год назад

If the market is a bubble (like it was and still is) a loan isn't a bad idea for the right purchase. Just be ready to be able to pay the loan back quick if you change jobs. And have payments setup through your bank account and not payroll deductions. As far as double taxation, dollars today are worth more than dollars later. Meaning, if your loan is at 4% and inflation is 8% (forget headline CPI which is a scam) you're essentially short the dollar. And I'm not talking about the DXY index.