Ideally, everyone would have a savings account or emergency fund to draw on when they face unplanned expenses. But in the real world, it’s common for cash flow to fall short of one’s needs from time-to-time. For many people, their largest financial asset is their retirement savings in a 401k account.
To help individuals manage the challenge of both saving enough for retirement and setting aside money for unplanned expenses, most 401k plans allow the business owner and employees to take loans from their 401k accounts. When the 401k loan is repaid to the plan account, with interest, an individual can stay on track with their retirement savings even while addressing short-term cash needs. But loans that are not repaid can put retirement savings at risk.
The maximum amount that you may take as a 401k loan is generally 50% of your vested account balance, or $50,000, whichever is less. If 50% of your vested account balance is less than $10,000, you may borrow up to $10,000 if your plan allows it.
All 401k plan loans must meet the following requirements:
The business owner has some flexibility in designing a loan program for their 401k. For example, they may choose to set a limit on the number of loans an employee may take at one time or within one year or set a minimum dollar amount for a loan.
Although general financial wisdom tells us we shouldn’t borrow against our future, there are some benefits to borrowing from your 401k.
Although paying yourself interest on money you borrow from yourself sounds like a win-win, there are risks associated with borrowing from your retirement savings that may make you want to think twice about taking a 401k loan.
Sometimes the immediate need for money outweighs the potential risk of a 401k loan. But before you decide to borrow against your 401k, be sure to consider your alternatives.
If you are a small business owner and need a 401k plan for yourself and your company, only Ubiquity offers flat-fee plans plus free expert advice. We’ll fully customize your 401k to meet the specific needs of your small business.
Setting up a 401k can be complicated. Only Ubiquity gives small business owners access to 401k experts in addition to industry leading low flat-fees. Each sales expert has over a decade of experience assisting business owners in 401k plan design. Take advantage of this free benefit.
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