mortagesandforeclosures

by Hunter Fisher

A retirement plan or 401(k) is a viable way to save for your retirement as it offers more advantages compared to Social Security pensions. One of the major advantages of a 401(k) plan is its tax perks. Your contributions are not taxable until after you start getting your benefits. Also, the contributor gets to decide how much to invest unlike with Social Security where a set amount of contributions are taken out of your wages.

There are many reasons why many people choose to get the 401(k). What most people do not know is that they can avail of a loan from this. For example, if there is financial need and there are no available resources, you can turn to your 401(k). But be sure that you know the vital details of these retirement plan loans to make certain you're not taking a blind risk.

The Advantages of 401(k) Loans

It is fairly easy to take out a loan from your retirement plan. You won't usually be burdened with the inconveniences associated with most other loans, such as long application processes and stringent qualification requirements. There are also practically no restrictions as to how to use the money. You can use the money to buy a car or refinance a house.

The interest rates that come with 401(k) loans are also quite low. What's more, the interest you pay gets credited back to your retirement plan -- so you're basically paying yourself back. You don't have to pay taxes on the interest either, unless of course you've already retired.

Its Disadvantages

Even if the interest on your 401(k) loan is tax-sheltered, it's not tax-deductible. Opportunity costs, such as tax-deferred compounding, is not applicable to the amount you borrow from your retirement plan.

Your contributions to your 401(k) plan may lessen when you take out a loan. Because you have monthly payments to worry about, you may compensate for this by reducing the amount that you invest in your retirement plan.

Most companies also charge a fee for retirement plan loans plus payment terms are not flexible. You have no way of changing the terms that go along with accessing the loan.

If you are delinquent on your payments this could impact heavily on your financial future. If you are to move to another company, you will be required to pay for the whole amount, usually within 60 days from the time you quit. If you are unable to repay the loan, taxes will be imposed on your payable balance, plus there are certain penalty fees that you will have to pay.

The Bottom Line

The 401(k) is a very good way to get the necessary financial aid, especially for emergency cases. But remember that the primary reason of the retirement plan is to secure a comfortable retirement and the chance for you to live your dreams when you grow old. Only get a retirement plan loan as a last resort.

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