Pitfalls of a 401(k) Loan

December 12, 2008 by blackgirlgrown
Filed under retirement planning

Kiplinger: Before dipping into your 401(k), you will need to understand the possible implications. You could face taxes and penalties, as well as the loss of compounded growth of your retirement savings. Rules vary by employer, but most individuals can gain access to their 401(k)s by taking either a loan or a “hardship withdrawal.” About 88% of plans in 2006 allowed participants to take loans, according to the Profit Sharing/401(k) Council of America. Under IRS rules, the loan amount generally must be the lesser of $50,000 or 50% of the account balance.

Nearly 20% of participants had a loan outstanding in 2006, according to the Employee Benefit Research Institute. The Vanguard Group reported a 9% increase in hardship withdrawals from 2006 to 2007. “In an economic downturn, it should not be surprising that people are using these features,” says Stephen Utkus, principal with the Vanguard Center for Retirement Research. Read More.