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.

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