Think twice about 401(k) loans

Previously posted January 19, 2017

Part of my role in the family business focuses on employee benefits so I have quite a bit of experience with 401(k) providers and the stacks of regulations associated with these plans.  One feature of the 401(k) plan is the ability to take out a loan against your balance.

It is up to the employer to include this feature in the plan, so we decided to do so as a benefit to the people putting their money in the plan.  Several employees have taken advantage of the feature, but I now question the real benefit of taking these loans to begin with.

Choices are limited when it comes to the time frame of paying back the loan, of course there are fees associate with the process, and you are putting money back into your pre-tax account AFTER you have paid taxes on the money.  Finally, I recently realized that if you take out a loan from your plan and you (voluntarily or involuntarily) change jobs, the total balance is due immediately.  Or the loan is shown as a taxable distribution, including any penalties associated.  Ouch.

Now it’s possible that different providers have different policies related to these types of loans so our plan may be more strict than others, but I don’t think the IRS provides a lot of leeway.  If you feel you need to take a loan from your 401(k) balance (and you are allowed by your plan), please take these issues into consideration before making the move.

Obama now a retirement savings expert

Previously posted January 27, 2015

 

As you may have heard, the president feels the federal government needs to be even more involved in your retirement savings and he is proposing changes to the tax code to make this happen.  “Fairness” for middle class savers is his stated motivation, but forgive me if I don’t take him at his word.  There are plenty of studies and statistics relating to savings rates and preparedness for retirement, and none of them are very promising.  I mention this because the idea that people need to save more and better plan for their passive income years is absolutely true.  The issue with this new tax/spend scheme is that it, along with every federal program designed to fix something, will simply create more bureaucratic control, increase costs, increase the national debt, and have zero or negative impact on the problem.  I make this statement not out of some personal dislike for Obama, but based on the very real fact that no federal government program can be cited that actually solves a problem.

The paraphrased nugget of wisdom I prefer in these situations is that we cannot use the same level of thinking to get us out of a mess that got us into the mess in the first place.  The federal government created this problem long ago starting with the income tax followed by the Social Security program, and finally the qualified retirement plan designed to avoid the income tax that was created in the first place.  Yes, savings rates are way too low.  Yes, people need a lot more education and guidance relating to money management.  But creating a new debt-expanding mess of regulations will not address either one.  In fact, I would argue they make people feel even less empowered and more beholden to the whims of the politicians in D.C.