How to Borrow Money Against Your 401K
Most people retire around the age of 65. Many workers, if they can afford it, save money to make it through their golden years. One of the most popular ways that United States workers save money is through 401(k) retirement plans.
What is a 401(k) retirement plan?
A 401(k) retirement savings plan, better known simply as a 401(k), is a retirement plan that is sponsored by an employer. One of the reasons why 401(k)s are so popular is because employees who use them get a tax break from the Internal Revenue Service. Further, employers usually match a portion of the money that you save each year and contribute that amount to your retirement account.
Another reason why 401(k) retirement accounts are so popular is that they reduce the amount of income that can be taxed by the Internal Revenue Service.
As if these reasons weren’t good enough, the growth on 401(k) savings accounts can’t be touched by the IRS, either.
How does borrowing money from your 401k work?
When people or businesses lend money, there’s always a chance that borrowers don’t pay their debts back. As such, lenders charge interest as a means of reducing risk.
Another common strategy used to reduce risk is to require borrowers to pledge some or all of the assets that they own as collateral. In other words, if those borrowers fail to make good on their promises to pay, lenders would have the legal ownership rights to those assets.
Although most collateral comes in the form of motor vehicles, land, and buildings, some borrowers offer the contents of their 401(k) retirement accounts as collateral to lenders.
How can one borrow money against their 401(k)?
Rather than pledging the entirety of your 401(k) retirement account to the lender you borrow from, you’ll withdraw money from your 401(k) and pledge that to the lender as collateral.
Keep in mind that you will have to pay a 10 percent early withdrawal penalty plus income tax. You’ll be taxed based on your marginal income tax rate.
Before taking out any money from your 401(k) retirement account, you should first determine how much money you want to borrow. Next, reach out to your lender – or bank of potential lenders that you’ll be choosing from – and figure out how much money they want to secure your loan.
Now, it’s time to work out your interest rate and repayment period. Every lender will extend to you a different interest rate and term length.
In general, the shorter the term length, the higher the minimum monthly payment.
The more money you put down as collateral to the lender, the lower the interest rate will be.
When it comes to paying back loans taken out against your 401(k) retirement plan, regular payments will generally be deducted from your paychecks. You may be subject to paying double the normal tax rate on such loans.
Not everybody is eligible for these loans. Some people might be disqualified for not having enough money in their 401(k) retirement accounts. Others might not have had their 401(k) accounts open for long enough to qualify.
However, if you are found eligible for this type of loan, you’ll have the benefit of getting quick cash loans nearly as quickly as the need for them arises.