Need some 401K advice please.

[maslex]

I'm going to start off by saying..........."YES, I know it's not the best idea to dip into your 401K but sometimes desparate times call for desparate measures"

ANYHOW, can someone with first hand knowledge of 401K's or someone who has taken out a withdrawal or a loan, please answer my questions.

At first I was looking to just take out a withdrawal. And yes, I know there is a 10% free and also taxes. But when I asked my boss for the paper work to fill out she said you're only allowed certain "reasons" to take the money out (certain hardships) So then I said, Ok, what about a loan against it, because I read somewhere that if you take out a loan, you will have the payment taken out of your check and that if you quit your job befor the loan is paid off, that you'd need to pay it pack in one lump sum.

So here are my questions.......IF I took out a loan, will the 10% fee and taxes be taken out of the 401K itself or do I need to come up with that amount out of my pocket. Secondly, if I were to leave the job before paying off the loan, my boss said that the remainder of the loan would be taken out of the remainder of my 401K. Is this correct?

 

[china mom]

I took a loan out against my 457 in 2007. I do not know if all of the rules and conditions still apply but here is my experience:

I did not pay any taxes or penalty on the money that I took out.

My payments on the loan were a payroll deduction and it included interest - which was being paid to myself. Think of the interest as paying the account back what it the money would have earned if it was still in the market.

I retired in 2010 with a small balance left on the loan. I had to repay hat balance with a personal check to avoid taxes and fees.

FYI, not all plans allow for loans against the deferred comp account. A friend just tried to borrow against his but the employer said that his account does not allow it.

 

[ZellyB]

I'm going to start off by saying..........."YES, I know it's not the best idea to dip into your 401K but sometimes desparate times call for desparate measures"

ANYHOW, can someone with first hand knowledge of 401K's or someone who has taken out a withdrawal or a loan, please answer my questions.

At first I was looking to just take out a withdrawal. And yes, I know there is a 10% free and also taxes. But when I asked my boss for the paper work to fill out she said you're only allowed certain "reasons" to take the money out (certain hardships) So then I said, Ok, what about a loan against it, because I read somewhere that if you take out a loan, you will have the payment taken out of your check and that if you quit your job befor the loan is paid off, that you'd need to pay it pack in one lump sum.

So here are my questions.......IF I took out a loan, will the 10% fee and taxes be taken out of the 401K itself or do I need to come up with that amount out of my pocket. Secondly, if I were to leave the job before paying off the loan, my boss said that the remainder of the loan would be taken out of the remainder of my 401K. Is this correct?

We currently have a loan against my 403b. You are correct that if you do it as a withdrawal you will have to pay the penalty and taxes. The penalty is assessed as part of your tax return, I believe, so it wouldn't be paid back to your employer or out of your check. It would be paid to the IRS. If someone who knows more about withdrawals knows differently hopefully they chime in, but that was my understanding how a withdrawal works. I'm also not sure that you are restricted from withdrawing from your account, but some reasons do allow you to avoid the penalty (you always have to pay the taxes). But, I think you can choose to withdraw whatever amount you want and for whatever reason, it's just a question of whether or not you have to pay the penalty. And, I believe that there are very few reasons that qualify to avoid the penalty.

As far as the loan goes, you do not have to pay a penalty or taxes. It's considered a loan and not income because you have to pay it back. Yes, the payment is automatically deducted from your paycheck and, yes, if you leave your job you have to pay it back in its entirety when you leave. You have a choice on how to handle the remainder of your loan. You can choose to have any remainder of the loan treated as an early withdrawal to retire the remainder of the loan or you can use other funds to pay it back (e.g. another outside loan). If you choose to treat the balance as a withdrawal, then you will pay the penalty and taxes on whatever that remainder is (not the original loan amount).

I would imagine that your employer uses some kind of fund manager to handle their 401k. If so, there is likely a fund administrator to whom you can speak. That person is probably better to speak with about this than asking your boss (or strangers on the internet ) who may not know all the intricacies of how these work. At least for me, there is a website where I can see my 403b and make some changes to it myself. The loan application was on that website. I filled it out in about 5 minutes and had a check in less than a week. It was very easy. Keep in mind that the payback terms are typically limited to no more than 4 or 5 years I think and so depending on how much you are borrowing, the payments (deductions from your paycheck) may be fairly high.

 

[China Expat]

I too had to pay taxes on a withdrawal from one of my 401 k.

 

[QueenIsabella]

No taxes on the loan. I think you can borrow up to $50k (possibly more for a home purchase), and you pay it back through paycheck deductions, usually for a term of 3-5 years. I believe you can choose the length within that window. Obviously, you pay interest, but you're paying it to yourself. This helps to mitigate your loss of time invested in the market, if that makes sense--you're not getting stock market gains, but you're "earning" (paying) 7% or so in interest to yourself.

If you leave your job, you have 60 days to pay back your balance. If you don't, it'll be treated as a withdrawal (taxes and 10% penalty).

The biggest issue most financial advisors have, aside from "don't tap your nest egg" is, a lot of people decrease or eliminate their contributions while repaying the loan. Try not to do this, if you can keep up your contributions. Your retired self will thank you. Of course, your retired self will also understand desperate times, so don't beat yourself up too badly if you can't afford both contributions and the loan repayment.

 

[LuvOrlando]

Don't let your boss talk you out of a withdrawal if you feel your situation justifies it, that's a you decisions and your boss has no business shaming you into a loan to appease them :/

To figure out if they withhold for you just call the place holding it, like Fidelity or whatever & they'll tell you flat out. If they don't hold the taxes and fees back for you just add on that amount and stick it in a saving account so you have it to pay taxes next year when you file. I would think most 401K's would hold it back so the gov gets their cut before you get your hands on it but whatever. Go look at the total percent you paid on income last year (Fed+State+etc) and if your income is about the same it's a good guess you'll end up taxed around the same amount on this. Pffft, it's your money, if you are ok accepting the fees and such it's nobody else's business, you do what you want - here is some info.

https://www.bankrate.com/retirement/ways-to-take-penalty-free-withdrawals-from-ira-or-401k/
I doubt I'd do a loan on my own money, didn't even know that is a thing but thinking on it the interest and fees plus headaches would prob wipe out any benefit to you for having money in the 401K... seems an unusual choice unless the added income would thrust you into a higher tax bracket or have some enormous impact somewhere.

Investors who get paid on commission always advise against touching the thing that makes them money, so keep that in mind when you listen to the industry whose advisors are also part of the industry. Even the advisors banned from investing get paid by advertisers on their shows and if they say the wrong thing POOF go the advertisers - pay attention to who advertises on a show and you know who pulls the strings :/

Don't be careless, it's a useful savings tool, but it is only a tool.

 

[GAN]

No taxes on the loan. I think you can borrow up to $50k (possibly more for a home purchase), and you pay it back through paycheck deductions, usually for a term of 3-5 years. I believe you can choose the length within that window. Obviously, you pay interest, but you're paying it to yourself. This helps to mitigate your loss of time invested in the market, if that makes sense--you're not getting stock market gains, but you're "earning" (paying) 7% or so in interest to yourself.

If you leave your job, you have 60 days to pay back your balance. If you don't, it'll be treated as a withdrawal (taxes and 10% penalty).

The biggest issue most financial advisors have, aside from "don't tap your nest egg" is, a lot of people decrease or eliminate their contributions while repaying the loan. Try not to do this, if you can keep up your contributions. Your retired self will thank you. Of course, your retired self will also understand desperate times, so don't beat yourself up too badly if you can't afford both contributions and the loan repayment.

This is solid advice. Only under the absolute worst circumstances should you withdraw. Loan is the best option in most cases. Best of luck to you.

 

[cdh]

I have no idea about your specific circumstances so I don’t know if this would work for you but you may want to research a 72t. Again, not sure if it will work for you but it may be worth checking into.

 

[GAN]

I doubt I'd do a loan on my own money, didn't even know that is a thing but thinking on it the interest and fees plus headaches would prob wipe out any benefit to you for having money in the 401K... seems an unusual choice unless the added income would thrust you into a higher tax bracket or have some enormous impact somewhere.

It’s a flat out penalty so has nothing to do with your tax bracket. Withdrawal would be the ABSOLUTE last resort

 

[LuvOrlando]

It’s a flat out penalty so has nothing to do with your tax bracket. Withdrawal would be the ABSOLUTE last resort

Well I'd assume if a person has cash in the bank they wouldn't be asking but I disagree that getting your own money it's a worse decision than a loan in all situations. Isn't there still the CARES Act this month, it did address 401K but not sure if the whole of it including 401K was extended with the student loan part? Not 100% sure but the OP shouldn't be pushed, no telling what the circumstances are and I doubt people who are of the mind to put money in a 401K in the first place are the sort who withdraw frivolously. There are many legit reasons it is justified and there are reasons the penalty is waived, the OP should look into the situation before deciding, but OP shouldn't be shamed.

 

[GAN]

Well I'd assume if a person has cash in the bank they wouldn't be asking but I disagree that getting your own money it's a worse decision than a loan in all situations. Isn't there still the CARES Act this month? Not 100% sure but the OP shouldn't be pushed, no telling what the circumstances are and I doubt people who are of the mind to put money in a 401K in the first place are the sort who withdraw frivolously. There are many legit reasons it is justified and there are reasons the penalty is waived, the OP should look into the situation before deciding, but OP shouldn't be shamed.

I don't believe anyone here is shaming the OP -just providing sound advice(without knowing the situation). Again -it should be the last resort as you'd be risking your own financial future. The possibility of a loan allows you to get the money you need, and replace it(essentially interest-free as you pay yourself back) over a period of time so that you have the money there when you retire. The associated fees are fairly minimal ...maybe 3% of the amount borrowed($30 per $1000). I agree it's none of her employers business but suggesting that they avoid a withdrawal is the best option in almost all cases.

 

[Snowflakey]

Go the loan route - not taxed and comes right out of your paycheck.

 

[amylevan]

Keep in mind that if there’s a set amount of money you need, (say $15,000 to pay off a medical debt) to get $15k you’d have to withdraw $15k + the amount you’ll owe in taxes + 10% early withdrawal penalty. If you take a loan, you only need to take $15k out, leaving the rest to sit and earn.

You pay the interest back to yourself, but you will owe the amount if you leave your job early.

 

[DLgal]

OP, explore ALL other loan options before doing this. Especially right now. This is a prime time to stay in the market and take advantage of the buying opportunity of a dip. The money in your 401k will grow FAR more over time than you think.

As a rough example, if you take a $10k loan and it takes you 5 years to pay it back, 30 years from now you will have LOST approximately $60,000 vs if you had just left that money in there to grow. This is the opportunity cost of that $10k.

I don't know your situation or your credit score or any of that, BUT lately credit cards have begun offering personal loans at competitive rates using your credit line. I have been given offers from all my cards for loans up to my credit limit at anywhere between 5.9 and 6.5% fixed interest, depending on the length of the loan chosen. If you have unused credit lines, look into this before tapping your 401k.

 

[tvguy]

Don't let your boss talk you out of a withdrawal if you feel your situation justifies it, that's a you decisions and your boss has no business shaming you into a loan to appease them :/

I think plan administrators have a fiduciary responsibility to try and talk you out of it. So they are just doing their jobs. Not enough information for me to judge if it is justified, but I have a VERY hard time believing there aren't other, better options.

 

[neverlandsky]

FYI: 401Ks are bankruptcy protected up to $1 million.

If you need to free up some funds now, definitely run the IRS withholding calculator and adjust Federal/State W4 withholdings especially if you receive a tax refund yearly. Tax Withholding Estimator - About You | Internal Revenue Service (irs.gov)

Cut all variable expenses. Put 401K contributions on hold so you have more funds coming to you on payday. Medical bills & creditors will work out payment plans monthly even if it's $5. Focus on shelter, utilities, food, & transportation first. The rest can & will have to wait.

 

[LuvOrlando]

I think plan administrators have a fiduciary responsibility to try and talk you out of it. So they are just doing their jobs. Not enough information for me to judge if it is justified, but I have a VERY hard time believing there aren't other, better options.

Yes, they have a fiduciary responsibility TO THE PLAN, not the person giving money to the plan, which is why it's always a blanket resposonse of, "bad idea, don't withdraw." Same goes for when you buy real estate, people think they are the thing being protected but, really, the agent usually has a default fiduciary responsibility it's the person selling so they are in line with helping get the price up and helping themselves via coimmission. It's important to know which side you are on in such things and whose best interests are being protected, generally it's not who people this it is. No-one here is an administrator anyway, if they are they are probably breaking some serious rules advising out of bounds and such.

 

[amylevan]

Yes, they have a fiduciary responsibility TO THE PLAN, not the person giving money to the plan, which is why it's always a blanket resposonse of, "bad idea, don't withdraw."

Technically, a 401k administrator has a fiduciary responsibility to the plan’s PARTICIPANTS. Not the plan itself. As outlined by the Department of labor and the IRS.

 

[_19disnA]

I would start by reading the information on the official IRS website regarding 401k's. Your company MAY allow for loans which are not taxed but have to be repaid in a certain amount of time. Your personal financial situation isn't something I would post online in a public forum. Hardship withdrawals are also discussed there as well. Generally, you want to treat your 401k as a retirement account vs. something like a home equity loan where you can borrow money to pay for a wide variety of things.

You should also talk with your HR department since they are probably in the best position to discuss the various options and how they apply at the company where you work.

401k Resource Guide Plan Participants General Distribution Rules | Internal Revenue Service (irs.gov)

 

[tvguy]

Technically, a 401k administrator has a fiduciary responsibility to the plan’s PARTICIPANTS. Not the plan itself. As outlined by the Department of labor and the IRS.

That is my understanding too. However, I will again repeat, there almost have to be better options.