|
Loans are only available to participants whose retirement
plans allow them. The good news is, most
plans do allow them. To be certain, however,
you should contact your plan administrator.
A loan allows you access to your retirement
savings without taking a withdrawal from your plan and possibly creating an
early withdrawal penalty. Loans can be taken for any reason and do not require
a qualifying event such as separation from service or an unexpected hardship.
Loans are typically repaid on a monthly or quarterly basis over a five-year or
less term. Often you can choose the
payment frequency and the duration. As
long as the loan is repaid in accordance with the loan agreement, you don't pay
taxes on the amount borrowed until retirement or other distribution event.
If you default on a loan, the amount will be
subject to taxes and applicable penalties.
Depending on your plan, you may have a minimum loan amount,
which is commonly $1,000.00. In
addition, the Internal Revenue Code 72(p) provides that the maximum total loans
of all eligible retirement plans may not exceed the lesser of:
- $50,000.00 or 50% of total vested benefits. Less any amount paid off within the last 12 months.
- $10,000.00 if the total vested benefits are under $20,000.00. Less any amount paid off within the last 12 months.
Taking a loan against your retirement savings
plan is easy. Unlike borrowing money from a bank or other lending institution, there isn't a lot of paperwork to
complete or the need to verify creditworthiness. The interest rate is usually lower than other
alternatives such as a credit card or personal loan. The interest you pay back is repaid to your
own retirement plan.
This Web site is not intended or written to be used as
legal or tax advice. As a taxpayer, you cannot use it
for the purpose of avoiding penalties that may be imposed
under the tax laws. You should seek advice on legal or tax
questions based on your particular circumstances from an
independent attorney or tax advisor.
*Statistics compiled from the 2004 Retirement
Confidence Survey, Employee Benefit Research
Institute; and "Coming Up Short: The Challenge of 401(k) Plans," Alicia Munnell
and Annika Sunden
|
|
