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Taking loan out of 401k?

What is the downfall of taking money out of our 401k? I mean my husband would be paying HIMSELF back with interest instead of us paying the interest on the car loan.

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Apr1l

Asked by Apr1l at 1:35 PM on Nov. 21, 2008 in Money & Work

Level 6 (115 Credits)
Answers (18)
  • You get a penalty from both the company holding your 401k that would come out of the account before they send you the money & you are taxed extra by the IRS at the end of the year.
    Anonymous

    Answer by Anonymous at 1:36 PM on Nov. 21, 2008

  • For taking a loan out? We're not taking out the whole amount. Cause i know they do all that if you take it all out.
    Apr1l

    Answer by Apr1l at 1:43 PM on Nov. 21, 2008

  • If you are paying back the loan--there is no penalty tax. You only pay the penalty tax if you default on the loan. We have done it several times. You aren't taxed on it at the end of the year...unless you default on the loan. On the plus side--you are paying yourself the interest.
    Jmcelroy

    Answer by Jmcelroy at 1:48 PM on Nov. 21, 2008

  • I know you get a penalty of some sort. I also know that you should NEVER EVER do this unless you absolutely have to! Taking out $$ right now would not be wise in this economy. You will lose a lot of money as stocks are very low. It would be much wiser of you to just continue paying the interest on the car loan.
    I have actually done the opposite I am putting every extra cent I have into my 401K because in a way stocks are on sale right now! So with that being said why on earth would you sell something for much less than you paid for it-doesn't make sense!!
    Anonymous

    Answer by Anonymous at 1:54 PM on Nov. 21, 2008

  • To my understanding...and we have a 401K loan out right now...when you take out a loan, you aren't selling your stock at at low price. We have had several 401 K loans and we've never said, "o.k., we'll sell this stock to take out this loan. But the loan is against your stock. And you definitely do not have to pay taxes on it or a penalty tax to the IRS at the end of the year unless you default on the loan. To me, this is the perfect time to take a loan out of your 401K. All of the stocks are down. the interest you pay yourself if more than you will make on your money in the stock market right now.
    Anonymous

    Answer by Anonymous at 2:02 PM on Nov. 21, 2008

  • i dont believe there is a downfall. go for it.
    Auntiemom410

    Answer by Auntiemom410 at 2:05 PM on Nov. 21, 2008

  • BTW- she isnt saying she wants to take out the money, she wants to take out a loan against it. Its two very different things.
    Auntiemom410

    Answer by Auntiemom410 at 2:06 PM on Nov. 21, 2008

  • I agree with you Auntiemom410. I would much rather pay myself interest than the bank. And you don't have to claim the loan as income at the end of the year because you are paying it back. Therefore, no penalty tax...or tax of any kind.
    Jmcelroy

    Answer by Jmcelroy at 2:08 PM on Nov. 21, 2008

  • I have a $1000 loan out on mine. Really the only downfall is that if you lose your job the loan in due immedietly. If you can't pay it, they then consider it as cashing out your 401K and you are hit with the taxes and penalties. I would never borrow large amounts from my 401K, but I took $1000 to settle a debt a had. My job is stable. There are no penalties to pay. My payment comes directly out of my paycheck. My plan did have a $30 set up fee. Thats it.
    Anonymous

    Answer by Anonymous at 2:36 PM on Nov. 21, 2008

  • Would be best to talk to a tax advisor or the advisor on the 401K. I believe it depends on the reason for the loan. Typically there is a 10% penalty plus tax on the interest. If it's a qualified loan, there is a different treatment -- typically no penalites or taxes. I am not familair enough with these rules.
    Anonymous

    Answer by Anonymous at 3:32 PM on Nov. 21, 2008

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