Catch a Gideon

Loans from 401K

January 9th, 2007 by Endless Aspiration

Trying to decide how much money to put away into a government sponsored savings account can be a difficult process. Once you put the money in, generally you can’t get it out until you retire without major penalties and taxes. It is possible to take loans out against these saving accounts. Generally you can take up to $10k for the purchase of a home without having any tax consequences. The terms of the loans depend on your employer. While you are entitled to the minimum IRS mandated loans, employers can give you more depending on their policies.

Figuring out what to put into my retirement accounts has been a difficult decision for me because I want to purchase a house a soon as possible. So I don’t want to put it into an account where I can’t get at my money, because I want to use that money for a down payment. For my personal 401k I can take a loan out up to 50% of the value of my account for the duration of five years (10 years if the loan is for a house). So if I have $10k in the account I can get a loan for $5k. Now here is the best part about these loans, the interest you need to pay on these loans is paid back to YOURSELF.

My employer’s required interest rate for a 401K loan is prime plus 1 point. So lets say prime is 6% I have to pay 7% interest on that $5k loan. In the first year I will have to pay $471 and $350 of that will be interest. Interest that would normally be paid to a bank will be paid to yourself. Unfortunately that money will no longer be in your account earning a return, but the cost of borrowing money is significantly reduced when you are borrowing from yourself.

Note: you cannot borrow from an IRA, but it is possible to take money out the account for 60 days without any tax consequences.

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