Getting a loan from your 401k (USA)

[luisacart]

Hi mga sis,

I'm having financial difficulty. Is it advisable for me to borrow from my 401k and then pay it back na lang? nahihirapan na kasi ako sa pag-juggle ng mga bills ko and i'm going back to school this semester. plus tumaas ang rate ng isang credit card ko ng 29.99 and they will not put it back down for another year daw. ang laki pa naman ng balance $3k at ang interes monthly is $120 something.

I'm 26 years old so bata pa ako. I have plenty of time to make up and save for retirement. Kaya nga ako kukuha ng AS Nursing degree eh dahil nahihirapan na ako mabuhay from paycheck to paycheck.

Ano ba ang mga "terms & conditions" that I need to watch out for when I borrow money from my 401k?

[anmar]

Naku sis our employees always borrow from their 401K. Yung iba nga they treat it as their bank account. LOL. After the loan is paid off, they will borrow again. Dala siguro ng economic situation ngayon, maraming bills na bayarin.
Interest rate is low right now. Sa amin it's 3.25%. You can only borrow half of what money you have in your 401K. And you can only have 2 loans at a time.
Usually what I ask sa employees is the amount they will borrow; how many years to pay; and the date of the first loan payment.
Basta just continue to make contributions to your 401K kahit na maliit coz it's for your retirement. I lost some money during the recession and I stop contributing for a few months dahil natakot akong maubos yung pera. But i started contributing again pero 3% nalang . It's slowly picking up kasi may gains na akong nakikita sa statement. Ako nga rin I'm tempted to borrow from my 401K pero wag nalang. Pag siguro wala ng choice (coz you can do hardship withdrawal) but ngayon, I'm still getting by.

[twentysomething gal]

Hi sis, I would ask first your 401K administrator- could be your controller or corp treasurer for the loan policies. Bawat company kasi ibat ibang agreement and terms for each 401K plan.  There should be a document or some sort of literature for employees regarding the plan. Normally they hand this out upon enrollment but if the plan admin does not, you can definitely ask for it. Maybe meron din online.

Usually nga  ang maximum 401k loan is usually 50% of your VESTED balance, meaning, kung halimbawa may $10,000 ka as your balance, but out of the $10K only $7k is your contribution and about $3K is your employer's match, and full vesting happens on your 3rd year of work, and first year mo palang, hindi $10K ang basis ng calculation for the 50% but rather only $7K + a percentage of your Employer's match na vested, etc etc. BUT, as I said before every plan is different and some plans adopted by some companies can be more restrictive, (ours can only give out one loan at a time) so ask for the plan literature to be sure.

Further don't forget na usually may initiation loan fee (ours is about $75 per application, plus quarterly maintenance fees (depende kung gano katagal yung loan mo) and interest in your loan. The interest and principal goes back to your 401K account, but the fees are deducted from your 401k account- forever lost and taken by the plan manager (ie fidelity)

also, never never be in default in paying your loan (if it is not taken out of your paycheck automatically) kasi the proceeds of that loan will then be taxable (federal, state and 10% excise --patong patong!)on the year of your default, plus penalties (see your plan documentation). So if you are taking out a loan, make sure na hindi ka mateterminate anytime soon or hindi ka magreresign, at kung mag reresign ka naman may pera ka to pay off the balance of the loan right away. Otherwise in default ka.

Un lang ang downsides na nakikita ko for now, aside for the lost opportunity costs of course in using your investment. Basta, read, read your plan documents first before making the decision. I know taking out the loan will help you with your financial situation and hopefully will help you fix your credit going forward.

hope this helps. pm me if you still have questions.