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With both 401k and Education saving Plans, all growth is tax-deferred. 

Proceeds from a Education Plan used to pay educational expenses are exempt from federal taxes. But 401k contributions are made in pre-tax dollars while Education Plans have to be funded with after-tax dollars.


Most parents will be in a better position to help their kids with college costs by maximizing their 401k and then taking a early withdrawal for their 401k plan to pay for Education expenses.
 

Home Equity Loan - Still a Better Idea Than a 401(K) Loan

By: Charles Essmeier

Anyone who borrows money is always looking for the cheapest source of funding. That makes sense; no one wants to pay more in interest than is absolutely necessary. And anyone with a sizeable amount of debt, such as credit card debt or a student loan, would be wise to consolidate their debt with a lower interest loan. One source of such a loan is a 401(K) account, which many consumers may have through their employer. Since the interest rate on Federal student loans rose on July 1, many students who missed that deadline may be wondering if consolidating through a 401(K) loan is a good alternative. Is it?

In a previous article, we have outlined several reasons why borrowing against a 401(K) account may be less favorable than using a home equity loan instead. The reasons include the fact that the interest on a 401(K) loan is not tax deductible, and that the borrower loses the ability for his or her investment to compound over time. If you have borrowed the money, it can't earn interest and the cost over twenty or thirty years could be dear. In addition to those, there are other reasons why a home equity loan would be a better source of consolidation funds.

The 401(K) loan is tempting. There is no credit check, the interest rate is usually favorable, and you are paying the interest back to yourself. The additional disadvantages are considerable, though. The money you borrow from your retirement account was money invested before taxes. The money you pay back is after-tax money, effectively increasing the amount that has to be paid back. Worse, should you lose your job, the 401(K) loan must be paid back immediately, in full. Should this not be possible, the loan is treated as a distribution, requiring the payment of a 10% penalty in addition to state and Federal taxes. With the job market still rather volatile, the additional risk of borrowing against a retirement account is substantial.

Borrowing against a tax-deferred retirement fund is rarely a good debt consolidation option. The tax disadvantages, the threat of penalties and immediate repayment and loss of compounding generally make such a loan a bad idea. Those with existing student loans should probably keep them; the interest is tax deductible and the rate is still lower than with most other consumer loans. For most anyone else, a home equity loan would be a better choice, offering deductible interest, fewer risks, and a fixed repayment schedule. Anyone considering a consolidation loan should consider all of these options carefully, as the cost of choosing poorly could be great.

©Copyright 2005 by Retro Marketing. Charles Essmeier is the owner of Retro Marketing, a firm devoted to informational Websites, including End-Your-Debt.com, a site devoted to debt consolidation and credit counseling, and HomeEquityHelp.com, a site devoted to information regarding mortgages and home equity lending .