401k loan

[NASCAR20FAN]

Worst case senerio is you get taxed on the distribution. This is not life ending. More than likely, the IRS will file an amended claim with the Trustee if you already owe back taxes or you can work out a payment plan with them. Bottom line, 401K loans are the way to go if you are in a desperate state. I just took one out last week and I am saving my home as a result.

Nevermind! it's obvious that some of the people on this forum do not get it

[MajorMike]

It's obvious. ...that YOU don't get it.
If you have no other options, there is no harm in it.
You're NOT screwed in the end.
This is what you don't understand. You put your income into it for a rainy day...whether that comes before retirement or not, that's what it is for. Most people don't even have that option. It's a bonus to those of us who do.

[MajorMike]

A number of companies now offer 401k plans to their employees. If you are one of those employees with a company 401k you may also have the option of taking a loan against that 401k.

The loan works differently from a withdrawal. A loan will normally allow you to borrow up to 50 percent of the balance of your 401k at an interest comparable to the Prime rate. Payments are made by payroll deduction and depending on the reason for your loan your repayment period could be up to 15 years. And there are no penalties for taking a loan.

But is taking that loan such a good idea? Take for instance a typical 30 year old who has been investing in their company 401k for the past eight years they have been with the company. They could have a $40,000 balance in the 401k account.

Now something comes up and they need money.

They could be purchasing a new car, consolidating credit card debt, or maybe buying a home. Suddenly the $40,000 in their 401k looks very appealing. Why wouldn’t it? They can borrow up to $20,000 of that balance with terms and an interest rate better than they can get at any bank. Plus they aren’t planning to retire for another 35 to 40 years and the money would be back long before that.

Here are some things to consider before making that loan:


The money you borrow will only earn you the interest rate of your loan. For instance if your 401k is currently earning an annual rate of 6 percent and you borrow half of your account for a prime rate of 4 percent you will be losing interest on the money you borrowed along with any compounding interest. ( MOST LOANS ARE OVER 6% )

Your contributions to your 401k are pre-tax but the payments you make to repay your loan are made after taxes. ( OUR 401K IS 75% AFTER TAX )

If you leave your employer prior to paying off your loan you will be required to either pay the entire balance due immediately or the balance will be subject to taxes and penalties like a withdrawal. ( SO WHAT, YOU PAY TAXES AND PENALTIES WORST CASE but you saved your home.

The interest on your 401k loan normally is not tax deductible like a home equity loan or a mortgage. ( IF YOU COULD GET A HOME EQUITY LOAN, YOU PROBABLY WOULDN'T NEED TO BORROW FROM YOUR 401K ANYWAY )

[MOMof3]

Nevermind! it's obvious that some of the people on this forum do not get it

I think we DO get what you are saying, and there is always a possibility that this plan could really suck in the long run for the OP, but I think your outlook on it is just a little to "gloom & doom" for this group! Giving advice for the financial future when we are all struggling in the present with our chapter 13 plans is bound to have you speaking to less than receptive ears. Double Taxation in the event of job loss is probably the LEAST of the OP's concerns right now. THIS PERSON NEEDS A VEHICLE!! Most of us have to live in the present just to get through the day. I doubt anyone would WANT to borrow from their 401k, heck, a lot of people would just like to actually have one, but if there are no reasonable alternatives, then borrowing from yourself is a no-brainer, especially when you don't have to hassle with a snooty bank, credit checks & you actually will get a DECENT interest rate! Yes, any one of us "could" get hit by a truck tomorrow---that is true, but we can't live with that fear. We have to put food on the table today. Now if the OP had said that they were going to rob a bank to pay off the car, I wouldn't have said go for it--jail doesn't seem like a good way to spend the retirement years, but the OP's plan seems reasonable and necessary to get the situation fixed in the time frame it needs to be fixed in!

[sophie]

Thank you!

Thanks you guys!!!! It is so comforting to know that there are others who know what you're going through.

With regards to the trustee, my lawyer said he does not need to notify him. As long as the payments are the same as what are leases are.

[sophie]

The legal way he put it was at my confirmation the estate vested back to me. So I don't need the trustee's approval about the loan.

[MOMof3]

I was also told it was ok to borrow from my 401k w/out court approval, but to make sure that I could afford the monthly payment. I am thankful that it is available to me if I need it, security is a good thing. Good Luck!

[BlessedOne]

I didn't need trustee approval either. My interest rate on my loan is 3.5%. I couldn't possibly get that rate from a bank if I had good credit.

[sophie]

Thanks Momof3, I feel exactly the same. I've very grateful that it's there.

[bmcmull]

Mom of 3, confused yet ? I think nascarfan 20 is right. Do not borrow against the 401k. Remember a couple of weeks ago I let you know you would not be able to re-lease or re-finance the leased cars. I know atty and trustee's tell you that you can, but its the banks that will say no. Lower your 401k contributions, pull together $1000.00 and go buy a cash car that will het you through the 13. How many more years left ? I am a finance director for a large national leasing company. You can find cars for the 1k area that will work. Dont pay attention to the retail end and do not go to a buy here pay here dealer that is not a franchised dealer. You will need a 1K down, go to a franchised dealer that has in house financing, and do your deal there. It will take some work to find one but they are out there. If you let me know where you live, city and state I'll help you find one. I buy cars all over the country, and would be willing to at least put you intouch woth someone who could get you moving in the right direction. good luck momof 3

[bmcmull]

Sorry mom of 3 I meant sophie. I hate being in a ch13 it is really tough. Tough choice ? Just remember when making these kind of decisions to pray on it, if it feels right in your heart, you will be able to move on with any consequences forth coming. Also remember what it was that got us here. You should expect the unexpected...........

[SANRA308]

One of our cars has 250,000 miles on it. We were told that we could borrow from 401k if we had to get another car. I would not cash out 401k, but I would borrow if I absolutly had to. On ours if we borrow we get the interest we pay.Also make sure you dont have to reduce your contributions to make the payment. I like the cash idea but if you have alot of time left in chaper 13 the $1000 car may need alot of work and end up being a money pit, 4-5 years is a long time

[bmcmull]

But a money pit with no car payment ? I do not know what you are oaying for yours but I would guess the car loans you gave up where probably 300-400 a month. That is money that you could be poutting aside incase something goes wrong. There is no perfect 1k car, that is why it is 1k but maybe you could spend 2k-3k, on the wholesale market and have something that would normally cost 4k-5k. You have to know the right people to get that but it is possible. Contact your local franchised dealer and ask for the used car director. Explain your situation and ask what he has in wholesale he is getting ready to dump at the auction. Find something he has 1k in and offer him $1200.00. He does not get a wholesale loss and avoids fees. It works, Try it. Be nice and explain your situation as you have done here and you will come out OK

[MajorMike]

Sorry mom of 3 I meant sophie. I hate being in a ch13 it is really tough. Tough choice ? Just remember when making these kind of decisions to pray on it, if it feels right in your heart, you will be able to move on with any consequences forth coming. Also remember what it was that got us here. You should expect the unexpected...........

THere is NO way I'd buy a car worth $1,000, I'd work another job to afford a nicer, more reliable car. I know people do what they have to but for me, no thanks.

[NASCAR20FAN]

I think we DO get what you are saying, and there is always a possibility that this plan could really suck in the long run for the OP, but I think your outlook on it is just a little to "gloom & doom" for this group! Giving advice for the financial future when we are all struggling in the present with our chapter 13 plans is bound to have you speaking to less than receptive ears. Double Taxation in the event of job loss is probably the LEAST of the OP's concerns right now. THIS PERSON NEEDS A VEHICLE!! Most of us have to live in the present just to get through the day. I doubt anyone would WANT to borrow from their 401k, heck, a lot of people would just like to actually have one, but if there are no reasonable alternatives, then borrowing from yourself is a no-brainer, especially when you don't have to hassle with a snooty bank, credit checks & you actually will get a DECENT interest rate! Yes, any one of us "could" get hit by a truck tomorrow---that is true, but we can't live with that fear. We have to put food on the table today. Now if the OP had said that they were going to rob a bank to pay off the car, I wouldn't have said go for it--jail doesn't seem like a good way to spend the retirement years, but the OP's plan seems reasonable and necessary to get the situation fixed in the time frame it needs to be fixed in!

There is not doom and gloom nor fear coming from me! Like I always say on here, all I can do is speak fom my experience. You obviously do what you fell you have to.