401k Plan Loans - An Overview
...... also be subject to 10% withdrawal penalty. A loan can't be rollover into an IRA.
There are generally four reasons given to avoid 401k loans if possible:
* Lower investment return. According to the General Accounting Office, the interest rate you pay yourself on your plan loan is often less than the rate your plan funds would have otherwise earned, and you lose the benefits of compound interest. * Smaller contributions. Because you now have a loan payment, you may be tempted to reduce the amount you are contributing to the plan and thus reduce your long-term balance.
* If you quit working or change jobs, you must pay back the loan right away. It's not uncommon for plans to require full repayment of a loan within 60 days of termination of employment. If you don't repay, the loan is considered defaulted, and you are taxed on the outstanding balance, including excise taxes in many cases. * Repayment of principal and interest is made with after-tax dollars. By contrast, a home equity loan from a bank is often structured so that the interest you pay is tax-deductible. On a larger loan, this could add up to significant savings.
Go to www.401khelpcenter.com for more information on this and other 401k issues.
About the Author Mr. Meigs is the founder and President of 401khelpcenter.com, LLC a three-year-old Internet Company based in Portland, Oregon. It is a leading provider of information, opinion, analysis, news, rules, and other 401k resources for plan sponsors, small businesses, and employees.
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