If you have a 401(k) plan, you might be tempted to borrow money from it. Keep in mind that the purpose of a 401(k) is to save for retirement. Take money out now, and you’ll risk running out of money during retirement. Still, if you’re facing a financial emergency, borrowing money from your 401(k) may be an option.
Should your plan allow loans, obtaining one involves little paperwork and no credit check. Generally, you can’t borrow more than $50,000 or one-half of your vested plan benefits, whichever is less. If you have any IRAs and/or former employer’s plan assets, consolidating these into your 401(k) plan might increase how much you can borrow.
Some advantages to plan loans are no taxes and penalties are paid as long as the loan is repaid on time. Interest rates are set by the plan administrator according to the terms of the plan and the interest you pay is generally credited to your own plan account; you pay interest to yourself, not to a bank or other lender.
Typically, you have to repay money borrowed within five years by making regular payments of principal and interest at least quarterly. You must follow the terms of your plan loan note; if you don’t, the loan will default and will be considered a taxable distribution. If you’re under age 59½, you’ll owe a 10% federal penalty tax, as well as regular income tax on the outstanding loan balance (other than the portion that represents any after-tax or Roth contributions you’ve made to the plan).
Many small business owners just can’t afford the high cost of adding a loan feature to their plan. AXA Equitable’s Members Retirement Program offers employers a loan option on their plan as part of a full-service program designed to minimize the amount of time and money AIA members spend setting up and managing their plans. For more information, call 800-523-1125, ext. 5985 or visit us online.
The Members Retirement Program is funded by a group variable annuity contract issued and distributed by AXA Equitable Life Insurance Company (NY, NY). AXA Equitable does not provide legal or tax advice. GE – 63207 (8/11)