Saving money for retirement is very important as it will help you secure the golden years of your life. You will not remain dependent on anyone if you have ample savings. One of the popular ways to save money for retirement is through 401k plans. You can define a 401k retirement plan as a special account which will be funded through your pre-tax payroll deductions. But you should also note here that if required you will also be able to take out 401k loans and withdraw money in times of need. However, there are certain things which you should remember while doing so.
Knowing About 401k Loans
Not everyone can qualify for 401k unsecured loans and withdrawals. In order to find out whether or not you are allowed to borrow money from your 401k plan, you will have to get in touch with the administrator of the plan. Here, you should note that there are certain employers who will only allow you to take out 401k loan when you are facing a financial crisis. Thus, they will not provide you with the loan if you wish to buy a home or a car. The application process for a 401k loan is quite easy and simple. It requires quite less paperwork and there is hardly any credit check required for the loan. However, you will be charged a small processing fee in the process. There are certain limitations in regards to amount of money you can borrow under this loan plan. You will never get the full sum. You will not be able to borrow an amount more than $50,000 or one half of the vested plan benefits, whichever amount less.
Just because you are borrowing money from your own retirement account, do not think that you will not have to repay it. You will be liable for repaying the loan amount within 5 years of taking out the loan. You will have to make regular payments and pay off the principal amount as well as the interest. In order to do so, many a times, you may have to choose the option of payroll deductions. There are certain repayment requirements and you will have to follow them word by word. In case, you are unable to repay the loan as per the set requirements, the money that you take out from this plan will be considered as taxable and you will be liable for paying taxes to the IRS. Moreover, if you have not attained the age of 59 and ½ years, then you will have to pay a federal tax penalty of 10% for borrowing money from 401k. Also, you will be liable for paying normal income tax on the installment loans balance.
You will be able to go for certain hardship withdrawals from your 401k plan depending upon certain factors. If you are facing medical hardship in relation to your spouse, yourself, your children or dependents, then you will be able to go for this loan option. You will be able to take out funds to pay for the funeral expenses of your close ones. You will also be able to use the money to stop foreclosure, purchase a new home, do repair work for your primary residence, etc.
Hope now your idea about 401k loans and withdrawals is clear!