Disadvantages of 401(k) contributions
Please keep this in mind; 401(k) loans are definitely not a good source for quick or emergency cash. 401(k) loans have significant negative consequences, both immediately and in the long-term. If you’re considering a 401(k) loan, please be aware of the following……
Applying for a 401(k) loan is time consuming and it can take several weeks before your cash is available. 401(k) loans are expensive! Your loan repayments are made with post-tax dollars.
If you leave your job you have only 90 days to repay the loan — in full. If you don’t (or cannot afford to) repay, any balance outstanding after the 90 days must be reported to the IRS as a loan default; loan defaults are red flags to the IRS and have the potential of triggering an audit.
If you default on your loan, you will be assessed a 10% federal excise tax plus state and federal income taxes against the unpaid balance.
Pulling money from your 401(k) account has a long-run negative compounding effect: You’ll likely have significantly less money available to you at retirement than you would if you didn’t dip into your 401(k) savings.
The amount of any loan outstanding at any time shall not exceed 50% of the Participant’s account balance, with the maximum loan plus interest not to exceed $50,000.
All loans shall be repaid by after-tax payroll deductions according to a fixed prepayment schedule measured from the date a loan is made. All loans shall be repaid within a period not to exceed five (5) years, ten (10) years if the loan is for a primary residence, or within 90 days upon termination of employment for any reason.
Ten-year loans for a primary residence cannot be for less than $6,000 nor more than $50,000.