Although 401(k) plans are intended to be used for retirement, you may be able to get money out before you retire. Many people think about withdrawing from their 401(k) plan, but you are only able to withdraw from it if you left or lost your job, are permanently disabled or are experiencing financial hardship. Even then, there are penalties for withdrawing from your 401(k), including a 10% penalty of the amount you withdrew, as well as income taxes on that amount. Thankfully, though, you may be able to get a loan, to buy a car or for other needs, from your 401(k). Find out more to see how you may be able to use your 401(k) to buy a car or take out another type of loan. To start planning your own retirement, check out the Suncorp superannuation page.
Does Your 401(k) Plan Permit Loans?
If you’re considering buying a loan using your 401(k) account, the first thing you will want to do is determine if your 401(k) plan offers loans. Your employer chose whether to permit loans or not when they launched their company’s 401(k) plan. You can only borrow from your 401(k) account if your plan allows loans, and if it does, the amount you can borrow is limited. You can borrow up to $50,000 if you have $100,000 or more in your account, and if you have less than $100,000 in your account, you can borrow up to half of the balance in your account.
Repayment of 401(k) Loans
Before you take out a 401(k) loan to buy a car, you will want to keep in mind what the repayment terms are. You will have to repay the full amount of your 401(k) car loan in five years, or it will count as a withdrawal, meaning taxes and penalties will be charged on it. The schedule of your repayment depends on what your employer requires. Some plans require monthly payments, while others may let you make quarterly payments. You may also be able to use an automatic payroll deduction in order to make payments for your loan. This is a great option to take if it is available to you, as it ensures that you will not default on your loan or miss payments.
Advantages of 401(k) Loans
There are several advantages of taking out a 401(k) car loan. One is that you will likely have a lower interest rate than you would on a typical car loan. Another is that you won’t have to have your credit checked in order to get the loan, so you know you can get the loan. You will also be paying back the loan to yourself, and you will be able to use the money later on, as both the principal and interest payments will return to your 401(k) account as you make them.
Disadvantages of 401(k) Loans
It is also important to be aware of the disadvantages of a 401(k) car loan. One of the biggest disadvantages is the problems that will arise if you do not pay your loan back on time. This will make the loan count as a withdrawal instead, which means you will have to pay income tax on the entire amount of the loan and you will owe another 10% penalty on the amount of money loaned if you are under 59 ½. In addition, you won’t be allowed to invest in your 401(k) for the following six months. If you quit your job while paying back the 401(k) loan, you will also need to repay the loan in its entirety immediately or it will be considered a withdrawal.