401(k) Loans – 4 Thoughts to Consider

Over the years, many 401(k) plan participants have approached me regarding the benefits and drawbacks of taking a loan from their 401(k) account. Often, the co-worker who approaches me has already concluded that borrowing from their 401(k) account is a good idea. After all, there is usually a compelling need for the money – such as using the borrowed money to pay off a high interest credit card. Part of their conclusion is the fact that the interest on the loan will be paid back to their 401(k) account – not to the credit card company or a bank.

Although the thought of paying back the interest to yourself is appealing, think long and hard before taking a loan from your account. In my discussions with my co-workers, I have stressed that they consider the following before borrowing from their 401(k) account:

1) Although you are paying yourself back with interest, your money is not invested in the stock market.

You may be lucky and manage to pay back most of the loan while markets decline, but that is unlikely. Just look at any chart on market performance, and over the majority of 5 year periods and over nearly all 10 year periods, stock markets have increased in value. I am a firm believer that you want to stay invested in the market as long as possible so that you benefit from all of these stock market increases. Simply put, I believe the longer you are invested in the stock markets, the better your performance will be. Taking a loan reduces the amount of money one has at work in their 401(k) account. Simply missing one stock market “bull run” while having borrowed a significant amount of your 401k can set your retirement piggy bank back for years to come.

2) The payments necessary to pay back your loan will lower your take home pay.

Although all the employees I have counseled understood that regular paycheck deductions would occur after taking a loan from their 401(k), many failed to truly budget for this lower take home amount.

For example, many employees who consider borrowing from their 401(k) account do so in order to pay off a pesky credit card bill. After all, that credit card company is charging interest of 15% or higher. By borrowing from their 401(k) account, one can eliminate the credit card debt and then pay the loan off through regular payroll deductions.

That approach sounds good in theory. In practice though, reality creeps in. Many of my co-workers who borrowed from their 401(k) account to pay off credit card bills would regularly approach me a few months later. Often, these employees would be asking to either take a second loan from their 401(k) plan or asking if their existing 401(k) loan could be re-structured in such a way to lower their paycheck deductions.

What happened? Why do they return to the piggy bank so soon after paying off their pesky credit card debt? Often, these employees did not address their appetite for credit before borrowing from their 401(k) account. Paying off their credit cards simply allowed many of them to incur more credit card debt. Then these employees had to deal with the double whammy. Not only did they once again have that credit card payment, their paychecks were lower since they were already paying off a 401(k) loan.

I strongly recommend that anyone looking to use a 401(k) loan to pay down credit card debt look to control their use of credit cards first.

3) Risk of unemployment

What happens if you have an outstanding loan and you lose your job for whatever reason? The short answer is you could have as little as 4 to 8 weeks to pay off the entire outstanding balance. If you fail to pay off your outstanding loan balance the outstanding loan amount will be treated as a distribution from the plan. This means that you will owe taxes on the amount you failed to pay back to your 401(k) plan account. Participants under age 59 ½ will be assessed a 10% tax penalty in addition to the tax obligation due on the unpaid loan balance.

4) Negates the tax advantages of your original contribution

A loan from a 401(k) plan is essentially borrowing pre-tax dollars from your account and then repaying the loan with after tax dollars. So although you gain the benefit of yourself back with interest, you actually negate the tax deferral advantage because you repay the loan with post tax dollars. On top of that, when you withdraw the money you used to pay off the loan, that money is taxed yet again.

There can be compelling reasons to borrow from your 401(k) account, but I recommend anyone considering such a step to fully understand the consequences of their actions – even if that money is going to pay off a high interest credit card or toward the down payment of a house. Do the following:

1) Talk to someone in your human resources department to make sure you understand the costs – including the reduction in your take home pay.

2) If the funds are being used to pay off a high interest credit card, take a look at your use of credit and figure our how to eliminate your reliance on this all to easy to use debt creator.

3) Budget for your lower take home pay. This is a very important consideration, especially if you plan to use your loan proceeds as a down payment on a house.

Furthermore, I have always used such discussions as an opportunity to recommend that my co-worker look to control or eliminate other expenses such as unused health club memberships, rarely watched subscription TV channels and overly expensive cell phone bills first. Even if you still decide to borrow from your 401(k) plan, lowering or eliminating these other discretionary expenses will help to offset the lower take home pay you will have.

Although I rarely advise anyone to borrow from their 401k account, taking these steps before you borrow should help you manage your paycheck better after you take a loan.

Copyright © 2009 by Jeff Brownlee

The Equity Home Loan & What it Can Do For You!

From a borrowers standpoint, the plethora of helpful loans out there is a littered landscape of lenders attempting to conform to consumers demand! It can be utterly confounding when trying to ascertain differences between the various styles of loans and credit available to find the best fit for us. However, one of the mainstay loan products we have come to expect pretty good things from is still the equity home loan! Yes, this collateralized note is downright cheap compared to plastic and probably always will be. Hence, the high demand by consumers to consolidate their credit card debt into a much lower equity loan rate!

The possible upside of this loan drastically outweighs it’s downside overall and can literally be a boon for making money, if you point this money in the right direction. Your ability is virtually limitless but your focus should be limited to particular styles of investing these funds.

Going ‘willy nilly’ on the disbursement of this cash can be nothing short of disastrous short and long term! By tightly focusing your sights on positive allocations rather than potentially negative, your setting yourself up then for success, even if a little glitch were to occur.

These styles are specifically home improvement based and (as mentioned earlier), debt consolidation based. When you place this money into these types of investments, you automatically receive debt relief (which is like making money), and you can see vast return on home upgrade investments.

In either case, your placing yourself into a much better position than you were previously! The only caveat: is when you improve your home with high ‘ROI’ based investments, you really cannot see the fruits of your labor, until you realize the sale of that home. Tangibles that are anything depreciating like vehicles of any type can counteract the positive effects of loans for home equity.

An Analysis of the Story Editha

The story Editha implied quite a prevalent and antiquated standpoint about war and its acclaimed days. The story itself embodied the kind of glamour and prestige that World War 2 movies portrayed, or so they did. Certainly, this short story tried to emphasize war as being beautiful and necessary for communal living. In some ways I can attest to that statement, but such is an immediate conclusion. The author seemingly framed the story revolving around the life of a couple.

It almost seemed like it came out of an epic love novel. Her feelings and aspirations about the honor that war brings between lovers was compelling and riveting. To the author, war was all about bringing out the victors and almost weeded out the losers that war brings. Come to think about it, war that has occurred in the past brought only horror and destruction. I am a personal believer that war is never a necessary tool to bring forth a common goal.

Being a devout Christian, conflict and struggle are among the first and foremost matters that we want to abolish. It is a sad fact though, that war cannot be avoided. Over the course of our history, a major war occurs every 100years to try alter the system that the world runs on. As new superpowers arise, the balance will shift and countries will begin having conflicts. Sad as it is, war will happen. Movies, story books and other literary devices will continue to glorify its image because people need a way to escape reality, think action movies or cartoons. Humans cannot bear the agony that war brings. There will always be more creative springs for us to hide our emotions about war but like what I said, it is a sad fact of life.