Episode 298

full
Published on:

24th Apr 2024

The Pros and Cons of Taking Out a 401K Loan

About the Guest(s):

Kerrie Beene is a certified financial planner and the Chief Investment Officer at Rooted Planning Group. With years of experience in the financial industry, Kerrie has helped numerous clients navigate their financial journeys and make informed decisions about their investments. She specializes in retirement planning and is passionate about helping individuals achieve their long-term financial goals.

Episode Summary:

In this episode of Money Roots, Kerrie Beene, a certified financial planner, explores the topic of 401K loans and the tax implications associated with them. She discusses how 401K loans work, the rules set by the Internal Revenue Service (IRS), and the importance of understanding your employer's specific rules. Kerrie highlights key considerations such as loan limits, repayment periods, interest rates, loan purposes, and employment status. She also emphasizes the tax implications of 401K loans, including potential income tax and withdrawal penalties. Kerrie advises listeners to explore alternative options before taking out a 401K loan and to consult with a financial advisor to ensure alignment with long-term financial goals.

Key Takeaways:

  • 401K loans are available to anyone with a 401K account and have a simpler and quicker application process compared to traditional loans.
  • The IRS sets limits on how much you can borrow from your 401K, generally up to 50% of your vested account balance or $50,000, whichever is less.
  • Repayment periods for 401K loans are typically within five years, although longer periods may be allowed for loans used to purchase a primary residence.
  • The interest rate on a 401K loan is often based on the prime rate plus an additional percentage determined by your plan. However, the interest paid is not tax deductible.
  • Some plans may have restrictions on the type of expenses for which you can borrow from a 401K loan, so it's important to check with your employer.
  • If you leave your job, the outstanding balance of the loan may become due immediately, potentially subjecting it to taxes and penalties.
  • Failure to repay the loan according to the terms outlined in your plan could be considered a distribution, resulting in income tax and a potential 10% withdrawal penalty.
  • Administrative fees may be charged for processing and maintaining the loan, which are typically deducted from your account balance.
  • Taking out a 401K loan means missing out on potential growth in your retirement savings, so it's crucial to consider the long-term impact on your financial plan.

Notable Quotes:

  1. "While you are repaying yourself, that money did become uninvested, and you will be investing it later, but you are missing out on that growth there." - Kerrie Beene
  2. "If you decide to take out a 401K loan, make sure you only borrow what you need and have a solid plan in place to repay it promptly." - Kerrie Beene

Resources:

Listen to the full episode of Money Roots to gain a comprehensive understanding of 401K loans and their tax implications. Stay tuned for more insightful episodes from the podcast to enhance your financial knowledge and make informed decisions.

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About the Podcast

Money Roots
Money Roots with Amy Irvine
Welcome to "Money Roots," the podcast where personal finance becomes personal. Join host Amy Irvine, CEO of Rooted Planning Group, as she demystifies the world of finance and makes it approachable for everyone, from beginners to financial experts.

In each episode, Amy and her guests dig deep into the financial soil, planting the seeds of financial knowledge and helping you nurture your financial future. Whether you're looking to build a solid budget, invest wisely, or plan for retirement, "Money Roots" has you covered.

Get ready to explore practical advice, inspiring stories, and expert insights that will empower you to take control of your financial destiny. It's time to grow your money roots and thrive financially!

Subscribe to "Money Roots" now and join Amy on this exciting journey to financial empowerment. Let's put down some roots and flourish together.

About your host

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Amy Irvine

As a kid, I always liked numbers. I would spend hours creating math problems and solutions. Whenever I wanted to play math teacher, my brother was forced to be my student! Given my love of facts and figures, it’s really no surprise that I chose a career where I work with numbers.

I believe that you can use your dollars and cents to create and live a meaningful life unique to your own dreams and desires. I started Rooted Planning Group because I wanted to offer financial PLANNING services. Our profession has a tendency to focus on “assets under management,” but I wanted to focus on the journey of your life (what I refer to in the podcast as your financial “vineyard”). I truly believe that, like wine, life and finances have different palettes that should be celebrated and not judged.

My journey as a business owner was not a direct path; it’s more of a long and winding road. Over the course of the past 30 years, I’ve worked in various financial services positions, but I’m most proud of the ensemble of women that I’ve brought together at Rooted Planning Group.

I am the author of Uncork Your Finances and the podcast host of Money Roots.

I also co-founded the Southern Tier Women's Financial Conference in 2014, an annual event dedicated to collaboration, networking, and financial education for women.