How to Get a 401k Loan
You spend years working hard at your job and saving money for retirement. In many companies, you get the huge benefit of being able to save money in a 401K account. You can have a small amount of money taken from each paycheck and placed into investments. This is essentially a savings account for your retirement.
Here is the thing - life happens. Sometimes we need the money before retirement happens. Then what do you do?
What happens if you need the money before you retire?
Let’s say that you have an unexpected life event that is going to cost you money that you do not have. I am sure that your first thought would be to take out a loan from the bank. That is a long process - maybe you do not have the time to wait. If your credit is not in top shape, you may not even get approved.
You May be Wondering How to Borrow from Your 401k
When you take out this type of loan you can withdraw up to 50% of the money you have in the account. The maximum you can withdraw is $50,000. You typically set up a plan to repay the loan within 5 years.
Are you a good candidate to take out a loan?
It can be a very stressful time when something unexpected pops up. It can be stressful to think about taking a 401k loan. You may even wonder if borrowing the money is a good idea. Think about it this way. The money is yours, and you can get out of a financial difficulty without getting a loan from another source.
Typically people borrow from their 401k account because of a life change or unexpected emergency. Some employers limit what the loan can be used for. Here are some common reasons that other people take out a 401K loan.
- Unexpected Medical Procedures
- College Tuition
- Down Payment on a Home (amount of time for repayment can be extended)
- Avoid Eviction
You are a great candidate to utilize this type of loan if you need are facing a similar situation and need the money quickly. Also, it is better to consider borrowing money from your 401k account if you have stable employment from your job.
You should consider another source of funding if you are going to leave your job in a few years or the potential of getting laid off is high. This is because leaving your place of employment will require the full amount be paid off within 60 days of leaving your position.
Benefits of Getting a Loan through Your 401k
There are some difference between getting a 401k loan versus getting a loan from a bank. Both types of loans have pros and cons. Weigh the pros and cons of each loan before making a decision.
Here are some pros to getting a loan from your 401k retirement account:
- Quick - Getting a loan from your 401k is quick. There is no long application or waiting process.
- No credit check - 401k Loans do not require a credit check so you don't have to worry if you have a less than perfect credit score.
- Repayment Terms - Making payments back into your 401k account is flexible and easy. Many times you can have your loan payments taken directly from your paycheck.
- Early Pay Back - Your loan can be paid off early with no penalties.
- Interest Taxed - Only the interest that is accrued during the loan is taxable.
- Interest Rate - The interest rate on such loans is typically pretty low.
- Default - Defaulting on your loan will not be reported to the credit bureau but you will receive a 1099 for the amount and it will be taxed.
How Your 401k Investments will be Affected
When your money is deposited into a 401K, it may be invested in several different areas. When you take out a loan, you can decide which investment to pull the money from. That means you can keep the investments that are making the most money and take from the investments that are not doing as well.
Do You Have to Pay the Money Back?
Although most people want to repay the money they borrow from their retirement account, it may be possible to get what is called a hardship loan. This means that you can take money out of your 401K without being required to pay any of it back.
This does come with a price however. The money being withdrawn will be taxed at the end of the year. You will also have a 10% penalty if you are under a certain age. In addition many companies will not allow you to contribute more money into the 401K for a certain length of time.
If you are considering borrowing money from your 401k through a hardship loan, it is imperative that you read through the terms and determine if it would be beneficial for you and your needs.
How To Borrow from Your 401k Quickly
So, now that you have decided to take a loan from your 401K, you may be wondering how to get started. It is actually a very easy process.
You can apply for a 401k loan by logging into your 401K account and filling out a simple form. If you do not know how to log into your 401k account, get it touch with your human resources department. They can help you get that information or may actually have the forms for you to fill out.
The money can be sent to you through your direct deposit information that is already set up through your employer. If you do not have direct deposit, you should receive the money in a few days in the form of a check. It is a simple process, and you can get the money you need quickly.