re: Borrowing from your 401k good idea or bad?

quote:

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While there may be some plans that require immediate payment I have never encountered one and there is no tax requirement to do so. You are the owner of vested funds and the customer not the employer. If for some reason the plan requires immediate repayment it will be clearly spelled out in the docs.

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Yes and no.

Under IRC Section 72, if you borrow from a 401K plan and then default on the repayment, at the time of default, the remaining amount borrowed becomes a deemed distribution, taxable at the time of default.

The amount of time before default is spelled out in the plan documents.

The problem is, how do you make those payments on the loan when payroll deduction is no longer an option? Generally, most 401K administrators deal directly with the employer. They (or the employer) may choose to not accept payments other than via payroll deduction.

So if you are stuck in a situation where your employer/admin doesn't choose to accept the payments not via payroll deduction (and I'm aware of no law saying they have to) then you are stuck with default.

Yes, all of this is spelled out in the plan documents.

Many companies want NOTHING to do with a 401K account for a non-employee. I've even seen some where within a year, you are required to roll it over, or they start charging you fees.

quote:

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Under IRC Section 72, if you borrow from a 401K plan and then default on the repayment, at the time of default, the remaining amount borrowed becomes a deemed distribution, taxable at the time of default.

The amount of time before default is spelled out in the plan documents.

The problem is, how do you make those payments on the loan when payroll deduction is no longer an option? Generally, most 401K administrators deal directly with the employer. They (or the employer) may choose to not accept payments other than via payroll deduction.

So if you are stuck in a situation where your employer/admin doesn't choose to accept the payments not via payroll deduction (and I'm aware of no law saying they have to) then you are stuck with default.

Yes, all of this is spelled out in the plan documents.

Many companies want NOTHING to do with a 401K account for a non-employee. I've even seen some where within a year, you are required to roll it over, or they start charging you fees.

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You are making this waaaay to complicated, upon separation from your employer you simply mail the 401k admin. a check every month, end of story.

There is no default, if you stop making the payment sure but that is another story.

My personal opinion is that if you have to borrow against your 401 then you should settle for a used vehicle you can afford.

Yes, by borrowing against your 401 you will be paying yourself. But this is not free money - you are missing out on possible gains by investing elsewhere.

ETA: In other words, you're getting a 0% return. If you happen to do this just before a big market crash that's fine, but normally this is not a good thing.