Using a 401K Loan to Stop Foreclosure
A bankruptcy or foreclosure can cripple one's ability to obtain
decent credit for many years. In addition, some employers and
landlords won't hire or rent to a candidate with terrible credit
history. Thus, it is a good idea to discuss all options with a
financial planner before ending in bankruptcy or foreclosure.
To avoid a bankruptcy or stop a foreclosure some people will
raise cash by tapping their IRA or 401(k). But withdrawing money
from a retirement account prior to age 59 ½ can trigger a 10%
penalty on top of the regular income tax on the money
distributed. Whereas a 401(k) loan that is repaid according to
IRS guidelines can avoid the tax hit.
Employees can contact their company's HR department to find out
if they have access to a 401(k) loan. Generally after leaving a
job one loses the privilege to obtain a loan from a previous
employer's 401(k). But, individuals with their own business can
still borrow from their retirement funds by setting up a Solo
401(k) plan with a loan option. The Solo 401(k) - also called an
Individual 401k or Self-Employed 401(k) - is designed for small
business owners with no employees. A Solo 401(k) loan does not
require a credit check because you are in effect borrowing from
yourself; the loan interest rate is often set at prime rate and
stays fixed for the term of the loan. The loan payments,
interest and principal, are put back into the borrower's 401(k)
It's possible to transfer without dollar limit the funds from an
IRAs, 401(k), or other retirement funds into a Solo 401(k) plan.
Once the funds are in your Solo 401(k), you can borrow up to a
maximum of $50,000 or 50% of the balance in your account,
whichever is less. The loan process generally takes a couple of
weeks after the funds are in the Solo 401(k) account.
Although a loan from a 401(k) plan is free of tax and early
withdrawal penalty if the loan is not paid back on time the IRS
will treat the balance of the loan as a distribution subject to
taxes and a possible 10% penalty. The Solo 401(k) is available to
any business that employs only owners and their spouses,
including C corporations, S corporations, partnerships, and sole
proprietors working part-time or full-time in their businesses.
The Solo 401(k) is not suitable for businesses with employees, or
those that plan to hire employees.
To withdraw from your 401(k) is an important decision that can
deplete a large part of your retirement nest egg if you are not
careful. A 401(k) loan should be used only for those times when
you absolutely need the money and you are certain that you will
be able to repay the loan to your 401(k) account.
Daniel Lamaute of Lamaute Capital, Inc., (InvestSafe.com) is
retirement plans expert. Visit www.investsafe.com to
learn about methods to maximize retirement contributions and to
reduce taxes and penalties on early withdrawals. Lamaute Capital, Inc. does not give legal or tax advice. Tax laws and regulations
are complex and subject to change. Please consult an attorney or
tax advisor for tax advice.