Stop Borrowing Money From Your Employer 401K
A majority of the population does not need an employer 401k. That said, some people are convinced that these things are not tax traps and that somehow everything will work out OK.
If you are still on the fence about this, or you still like your traditional plan, you might as well get the most out of it. And, one of the best things you can do with your 401K is to leave it alone. Don't ever take a loan against your 401K if you plan on keeping it. Either cash it out or keep it in there, all of it.
The reason for this is that if you cash out your 401K, you will pay taxes, and a penalty, and that won't be fun, but it's a one time hit. When you take a loan against your 401K, that's the penalty that keeps on giving. First, you give up the earning potential of the money inside the plan, because these "so called" loans are actually a withdrawal of funds out of the plan (on a tax-free basis).
Most fixed-type investments are debt instruments. They are loans. Examples of this would be T-bills and bonds. In reality, you are lending either the Government or a corporation money in exchange for interest plus your principal after the term of the loan.
Loaning money to yourself is basically replacing the interest you get from one source with another. That's unfortunate in some respects because the money is not in your account. While this may be good during a market downturn, it essentially represents a higher savings rate with 0% return from investments.
In addition, the interest payments you make back to your 401(k) are with after-tax dollars; and consequently, when you make a final distribution on that money, you will pay tax again on the money you paid back as interest.
Since this happens every time you take a loan against your individual 401k, you are really setting yourself up for a larger tax bite than you otherwise would have been subjected to.
If you are still on the fence about this, or you still like your traditional plan, you might as well get the most out of it. And, one of the best things you can do with your 401K is to leave it alone. Don't ever take a loan against your 401K if you plan on keeping it. Either cash it out or keep it in there, all of it.
The reason for this is that if you cash out your 401K, you will pay taxes, and a penalty, and that won't be fun, but it's a one time hit. When you take a loan against your 401K, that's the penalty that keeps on giving. First, you give up the earning potential of the money inside the plan, because these "so called" loans are actually a withdrawal of funds out of the plan (on a tax-free basis).
Most fixed-type investments are debt instruments. They are loans. Examples of this would be T-bills and bonds. In reality, you are lending either the Government or a corporation money in exchange for interest plus your principal after the term of the loan.
Loaning money to yourself is basically replacing the interest you get from one source with another. That's unfortunate in some respects because the money is not in your account. While this may be good during a market downturn, it essentially represents a higher savings rate with 0% return from investments.
In addition, the interest payments you make back to your 401(k) are with after-tax dollars; and consequently, when you make a final distribution on that money, you will pay tax again on the money you paid back as interest.
Since this happens every time you take a loan against your individual 401k, you are really setting yourself up for a larger tax bite than you otherwise would have been subjected to.
About the Author:
About the author:David Lewis, RFA is a professional financial adviser. If you would like more detailed information about any aspect of personal finance, please visit David's website.
posted by Debt Consolidation Loan at
4:23 AM
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home