A 401(k) withdrawal may not be as detrimental as you think.
Despite what some may think, making an early 401(k) withdrawal can be a sensible decision.
That’s why we’ve come up with the helpful list below of some scenarios where a 401(k) withdrawal makes sense.
Allows for Quick Access
There are a number of situations in life where you need liquid cash. For example, if you find yourself in a crisis or medical emergency and need to make a lump-sum payment. Or, if there’s been a significant change in your regular income (such as a layoff or pay cut)
This is when a 401(k) withdrawal can help. An early withdrawal is typically the quickest option for accessing extra funds. Especially when compared to other methods (like a credit line or loan).
Taking out a loan from your 401(k) means you can bypass the lengthy application process or credit checks. Plus, most people are now able to access their 401(k) accounts online. Meaning, you can easily transfer your cash into your bank account within a few days. And, all from the comfort of your own home.
Finally, a 401(k) withdrawal does not involve a lender or an evaluation of your credit history. This is a win-win as you’ll be able to cover immediate expenses without jeopardizing your long-term goals.
Lower Cost Option
Taking a loan out through your 401(k) is not a taxable event. You will only incur a penalty if the repayment rules or limits are violated. So, this is often a better option when you’re low on cash compared to things like payday or title loans.
You are typically able to receive up to $50,000 or 50% of the assets (whichever is less) on a tax-free basis. But, keep in mind, that you must repay it.
Regulations state that it must be as if the transaction had never occurred. Meaning, you will have to work to get your account back to how it was and as if nothing had ever happened. Resulting in a clean financial record and money back in your wallet.
Provides Long Term Success
Taking out a loan from your 401(k) can also make sense if you’re looking to protect your long-term financial goals. Firstly, your credit score will not take a hit. Meaning, you’ll be able to continue to apply for loans, credit, and other services without carrying around the burden of a lower score. This is because taking money out of the account will have no immediate impact on the score.
Secondly, your retirement savings will be safe. This is because you will have to pay the balance of the loan back. So, if you are able to create a repayment plan and stick to it, this option will have little to no impact on your finances.
Just be sure to work with a professional, like us, to create a plan that’s best for you.
Offers Payment Flexibility
Ultimately, you will need to pay the loan that you’ve taken out of your 401(k) back, but the repayment process is pretty flexible. Especially in comparison to other loan options which can come with hefty fines and inconsistent dates.
It is important to keep in mind that there are regulations specifying a five-year amortizing repayment schedule. However, you can pay the loan back faster without penalty.
Taking out money from your 401(k) can be a tough decision to make. But, with a strong financial plan, determination, and willingness to pay it back you can achieve long-term financial success. For advice or a free consultation, call us today at 407-328-5001.
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