For many people the quickest way for them to access an emergency loan quickly is to tap their credit cards, or their retirement account. But these methods have their drawbacks. Credit cards generally carry high double digit interest rates and wicked fees. On the other hand, early withdrawals from an IRA or 401K can trigger tax and penalties of up to 45% of the money withdrawn.
While it is best not to touch retirement savings prematurely, if you have to tap your retirement account a 401K loan may be the most sensible method. The advantage of a 401K loan as opposed to a withdrawal is that a loan does not necessarily generate the taxes and penalties frequently associated with early withdrawals. Loans from a 401K can go as high as $50,000 per borrower.
The majority of employers offer 401K loans in their plans. However, individuals who do not have a job with a 401K loan option may qualify to set up their own Self-Employed 401K for any kind of business (new or old, part-time or full-time) and borrow from that 401K. They can start their 401K by rolling over or transferring funds from an existing IRA or 401K from a previous employer into their new Self-Employed 401K.
A Self-Employed 401K loan is quick to obtain because it comes out of the 401K account. The loan interest is fixed at prime rate for the duration of the loan. Typically the loan must be repaid in equal installments over no more than five-years. The loan payments, interest and principal, go back to the borrower's 401K account.
A 401K loan is free of tax and tax penalty as long as the loan is paid back according to IRS guidelines. Otherwise, the unpaid loan balance is treated as a withdrawal.
The Self-Employed 401K is a valuable retirement savings tool for any business that employs only owners, or owners and their spouses, including C corp, S corp, partnerships, and even sole proprietors working from home. The Self-Employed 401K is not for owners with employees or planning to hire employees.
Copyright: Copyright c 2007-2008 Daniel Lamaute
About the Author:| Visit http://www.InvestSafe.com to learn more about the Self-Employed 401K and its loan feature. You may request online a loan brochure and a free kit that contains a Self-Employed 401K application and mutual fund prospectus. |
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