401K Loan: Think (Years) Ahead Before Taking a Loan

Many individuals are struggling with the long-lasting business and income implications of the coronavirus pandemic as companies restructure, downsize or eliminate positions. One strategy some individuals are turning to as a means of increasing cash flow, at least in the short term, is a 401K loan. With the economic stress, you may find yourself scrambling before the holidays and year end, but we want you to know alternative options exist that may not carry similar complications or potential long-term issues.

Before taking a 401K loan, what you should know.

• Not all employers permit loans from their plan
• Interest on a 401k loan is not tax deductible.
• An employee may feel obligated to one’s employer for longer than they want. If one is considering leaving their job, one typically has 60 days to repay the loan.
• If an employee has a child attending college and you do not repay the loan, the amount borrowed will be considered a distribution and show up as income. This could impact how much financial assistance the FAFSA or higher education institution will provide for the future student.

Be certain to read the fine print.

Employers can add caveats to their specific plans that will prohibit your ability to maximize the benefits of a 401K. Some plans may not permit an employee to make further contributions to their 401k until the loan is repaid in full or an employee may lose the opportunity to receive an employer match on contributions until the loan is repaid in full. Be certain to read the stipulations prior to taking a loan.

Alternative Ways to Help During Financial Difficulties

The unexpected length of the pandemic has presented many challenges to remain financially solvent. One option is to speak with your lenders. Many lenders and financial companies have notices on their websites to contact them if you are having trouble making ends meet. You may qualify for reduced payments or a forbearance. Don’t be afraid to ask questions to find ways to reduce your monthly expenses.

If you explored all of the options from your lenders including delayed or reduced payments on various loans or forbearance options, the following may help:

Mortgages

You could consider refinancing your mortgage, especially with how low the interest rates are. There are fees for refinancing, but this could be an option if you are still able to work but concerned of lower income to come.

Home Equity Loan

If you own a home, you can see if you have enough equity to borrow against your home’s value. Most lenders will require you to have a minimum of 20% equity and to retain that amount after taking out a home equity loan. A similar option is to “cash-out refinance”, this means one would refinance their mortgage and take cash out at closing.

Personal Loan

Taking out a personal loan is another good option, but they generally have higher interest rates than home loans because they are not secured.

Credit Card with 0% APR

If you have good to excellent credit, you may qualify for a 0% APR credit card. This could help you get the cash you need, especially if you are able repay your credit card before the period ends. An APR period typically ranges from nine to eighteen months, depending on the card.

You Aren’t Alone

Know that you are not alone and if you need help creating a new budget, or finding ways to reduce financial burdens, we are available to assist. With 2021 quickly approaching, now is the time to reassess your finances and budget.

Should you have questions about this or other topics, please know we are available to speak by phone at 215-675-8364.