Strategies to avoid the 10% early withdrawal penalty – 401(k) loan

May 14, 2019
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One strategy that can free up significant amounts of cash fairly quickly is a 401(k) loan. Many plans permit loans from your 401(k) that can be paid back over varying lengths of time, sometimes as long as 5 years, or even 10 years if used for the purchase of a home. You usually have to be employed by the company at the time of the loan. Most companies permit loans that are 50% of the vested plan balance or $50,000, whichever is less. If your balance is under $10,000, you may be able to borrow a greater percentage.


Reasons to consider

-Different from a typical loan, you actually pay yourself back with interest

-Easy set up through payroll and 401(k) provider

-Immediately reinvested as it is paid back


Questions to consider

-Do I have to take this loan or can I save for this purchase or expense?

-Will my employer continue making 401(k) matches on my contributions?

-What happens to my loan if I leave my company?

-What happens if I am unable to pay back the loan?

-How will paying back this loan change my tax strategy?


Disclaimer: Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified investment, tax or legal advisor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategies may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss. You should consider the investment objectives, risks, charges and expenses of any investment carefully before investing.