Platinum Swing Trade Alerts

The 10-Buck Broker (Long-Term Stock Picks)

Announcement

Collapse
No announcement yet.

401K Loans and Options

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • 401K Loans and Options

    People always are inquiring on the ability to take 401K loan and whether they should take one or not. Now, don't get me wrong, I think exercising 401K loans are not only a valuable avenue to potentially exercise, but can also make good financial sense. But, the ultimate key to whether or not one should take a loan is based on whether they disciplined and able to repay the loan?! If so, then a loan provision can be a valuable tool for you to consider using.

    Obviously, in today's sluggish economy, taking a loan from a 401K is of interest to many, and one of the most "googled" terms when it comes to inquiries about 401K plans. This is both unfortunate and expected. However, a 401K loan (and let's look within the confines of a self-directed 401K plan), can be a great tool for the able and disciplined individual.

    Ease and Access - When you meet the requirements for a self-directed 401K and have your funds within your own 401K plan, accessing your funds can be:

    1) Quick,
    2) Easy,
    3) Confidential, and
    4) No Credit History is taken into consideration

    Loan Requirements - Obviously, IRS requirements need to be met. If one qualifies for the 401K plan, they can take a loan of up to 50% of the account balance OR $50,000, whichever is less. Further, this loan can be

    1) Used for any reason whatsoever and is
    2) Tax and Penalty Free as long as they....

    follow the IRS' terms for loan repayment. So, what are the repayment terms? Well, simply, the general parameters are that:

    1) The loan must be fully repaid with P & I within 5 years;
    2) The loan must be amortized with quarterly repayment terms;
    3) Interest must be legitimate (a good example would be in taking the loan is for the individual to always charge themselves at least 1% more than the going rate. However, remember, all loan P & I proceeds are going back to YOUR retirement account).

    Now, let's say that an individual is in desperate need of some of their retirement funds due to financial chaos. This individual is, for this example, self-employed and has all their retirement assets in an IRA (but they, as an individual, qualify for the 401K). Let's also say that the individual is 45 years old and is in a 40% tax bracket. Due to their need or want, they are thinking about taking a distribution from their IRA. How would they be affected (this is only for illustrative purposes only, ALL tax questions you have should be directed to your CPA or tax preparer) if they took a $50,000 distribution from their IRA?

    Distribution Proceeds $ 50,000
    Less Federal, State and Local Taxes $ 20,000
    Less 10% Imposed Excise Tax $ 5,000
    Remaining Funds Free to Individual $ 25,000

    Yikes, pretty scary. Now, let's use the same individual who qualified for a SD 401K and, once established, took a loan from their account. Of course, they still have to meet the requirements for loan repayment previously stated, but now look at how by taking the loan, what happens to the numbers:

    Loan Proceeds $ 50,000
    Less Federal, State and Local Taxes $ -0-
    Less 10% Imposed Excise Tax $ -0-
    Remaining Funds Free to Individual $ 50,000

    Here is where the able and disciplined comes into play. IF the individual is ABLE to repay the loan and DISCIPLINED to repay the loan, why would the individual ever want to take the money out as a distribution?! First, they are draining their retirement account by $50,000 and only keeping $25,000 of the distribution with the IRA. In contrast, with the 401K, the individual can have full access to the $50,000 and, if able and disciplined, repay all the money back to the plan (therefore, not draining it by $50,000). Further, by paying interest as well, the individual is also adding money to the plan. In doing the loan, they still have the ability after the loan repayment to keep the $50,000 in their retirement account, add additional monies in loan interest to the plan, utilize 100% of the funds for what they want to use the funds for, and not be penalized with potential Federal, State and Local taxes.

    NOTE: All of this "good" news is also tempered by the fact that the individual repays the loan. If an individual does not repay a loan, the unpaid portion is considered taxable income and may be subject to full taxation AND a 10% excise tax (if the individual is under the age of 59 ½ when the loan was taken).

    To loan or not to loan....that is the question (gosh that sounds like a cheesy use of plagiarism)! However, if exercised correctly, the loan from the 401K can be a very advantageous tool for the individual to consider.


    Article Source: http://EzineArticles.com/6414234
    Platinum Swing Trade Stock Alerts(FREE 14-Day Trial)

    The 10-Buck Broker (Long-Term Stock Picks)


    Best Stock Picking Services

    Sign up for the forum to reply to this post!!!


    Best FOREX Signals Software

    Stock Market Investing For Beginners


    "Step into the arena and hold on to your hat. Don't get discouraged if you don't make 8 trillion dollars in your first month. Trading is not a get rich quick scheme. Realize that trading is a skill and just like any other skill it takes time to learn. Have convictions in your decisions in life and trading. Ignore the comments and "advice" of those that have never traded a day in their life."

    Good KARMA and positive energy abound.


    Terms Of Service

    Disclaimer: This website provides information about the stock market and other investments. This website does not provide investment advice and should not be used as a replacement for investment advice from a qualified professional. This website is for informational purposes only. The Author of this website is not a registered investment advisor and does not offer investment advice. You, the reader, bear responsibility for your own investment decisions and should seek the advice of a qualified securities professional before making any investment.

    Promoted content: You should assume that this website has an affiliate relationship and/or another material connection to the persons or businesses mentioned in or linked to from this website and may receive commissions from purchases you make on subsequent websites. Always exercise due diligence before purchasing any product or service. This website contains advertisements.
    Best stocks to buy now Stock Market
    Best stocks to buy now
    Dow Jones TodayDJIA
Working...
X