If you're like most Americans, you know at least one friend who has lost his job in this difficult economic time. Even people who are fortunate enough to continue working have suffered pay cuts, layoffs and wage freezes. So when financial advisers are telling us to get rid of debt, how do we do? Many people think of their 401k. The money is sitting there and most 401k plans, the worker can borrow against the account. It is an option, but it is the right choice? Let's explore.
The rules for a 401k Loan
Most 401k plans have a provision to allow a loan against your retirement account. The rules are quite simple (at least in most plans). You can borrow up to 50% of the vested account balance. Or, if you have that amount, $ 50,000, whichever is less. In the rematch, they generally have a maximum of five years to repay the loan, unless the loans for first homes, then the government allows a greater recovery.
On the positive side
There seems to be some advantages to taking a loan against your 401k. First, for many people is that there is no credit check on the loan. Even if you have good credit, do not necessarily want other research that shows in his report. That's understandable. Moreover, the interest rate is usually low. Indeed, it could be the lowest rate of interest you have (or would). So aa taking $ 5,000 from credit card debt with a 18% interest rate and payment if a loan of 401k at 8% seems smart money moves.
On the negative side
If you ask me, far more than their less any benefits. Where to begin? First, if you lose your job, or leave voluntarily, you owe the loan immediately. Yes, no more than five years to repay the money. You have (for most plans) 60 days to repay the loan. Can you honestly say that your work is safe? Do you know for a fact that is not going to change jobs or cities within the next five years? Everything is so uncertain these days, why take the risk? Secondly, taking money from their future to pay for this. Do not. Even if you want to use for your first home, the benefit is negligible. These are the years that we should put as much as possible to retirement. The stock market is recovering and every penny you put into retirement accounts, will reward you ten or twenty times in 50 years. The longer you delay retirement savings benefit least.