To Pay Off Or Not To Pay Off

[krayziebone33]

Originally Posted by LuxLiving

No krayziebone33, the OP has apparently borrowed from his own 401-K funds which is allowable, but if you get fired then the loan has to be repaid immediately. A 401-K is a retirement savings device supposedly designed for the future and OP has borrowed against it, which at times is cheaper than borrowing elsewhere.

Thanks, LuxLiving. I still, however, need some more clarification. Right now, I have about $775 in my 401(k) at work. Say I take out $500. Are you saying that I eventually have to give that money back? What if I do not get fired or quit? Do I have to pay it back then? From what I read, it seems like as long as I manage to keep working there, then I do not have to pay it back. Do I have the correct understanding, or is there much more to it?

[LuxLiving]

relevant article:

http://moneycentral.msn.com/articles...asics/4714.asp

google "401K loans" for more such info.

[disneysteve]

Originally Posted by krayziebone33

Right now, I have about $775 in my 401(k) at work. Say I take out $500. Are you saying that I eventually have to give that money back? What if I do not get fired or quit? Do I have to pay it back then?

Even though it is your own money, it is still structured as a loan due to tax matters.

Most plans limit you to borrowing 50% of your balance, so in your case, you couldn't borrow more than $387.50 (assuming there is not a minimum loan size). You would then have to pay it back over an agreed upon time period, just as with any other loan, plus interest. Although the payments and interest do go back into your account, you've lost valuable, irreplaceable time for the money in your account to grow and compound in a tax-free environment, thus reducing the ultimate value of your retirement nest egg. That is the main reason why borrowing from your 401K should be a last resort source of funds in most cases. That money is intended for retirement and shouldn't be looked at as a place to get money when you need a new car, want to go on vacation, want to fix up your house, etc.

[MonkeyMama]

I think to clarify - yes. You can not take money out of your 401k, unless it is structured as a loan. Well, you could take it out and pay taxes + the 10% penalty for early withdrawal. It is designed not to be touched until retirement.

If you leave your job is about the only common exception, then you can take it out and deposit it in an IRA where it shouldn't be touched until retirement.

[krayziebone33]

Thank you all for the information. This has been most helpful.