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08-24-2004, 10:02 AM
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#1 |
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Registered User
Join Date: Aug 2004
Posts: 8
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401k Laon
Correct me if my assumption is wrong. Two questions: Is it true that if you take a laon out of your 401k saving. The laon will be subjected as taxable income? Assume that you took half of the saving, does the remaining saving continue to be invested as usual or will it temporary be frozen until the laon is fully paid back? Please advise. Feel free to add any other comments.
Thanks in advance. lalee |
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08-24-2004, 02:01 PM
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#2 |
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Registered User
Join Date: Oct 2001
Posts: 1,586
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Lalee,
Loans from any source is not taxable income, Loans are to be paid back. taking a loan from your 401K plan you establish a pay back plan. If you fail to pay back the loan, the loan is then considered a premature distribution if you are younger than 59.5 yrs. The premature distribuion is subject to a 10% penalty, and the loan is considered as regular income and is subject to regular income tax. Example: You fail to pay a $10,000 loan. The 10% penaty = $1,000. Your normal income tax rate of 15% will add an additional tax of $1,500. Your total cost for not paying the loan would in this example would be $2,500, plus your additional state income tax. Are your other 401K assets frozen? This you should ask to your 401K plan administrator. I do not think that is the case, but it could be in some 401K plans. |
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08-24-2004, 04:34 PM
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#3 |
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Registered User
Join Date: Aug 2004
Posts: 8
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clydewolf,
Thanks for the insight. |
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08-26-2004, 01:57 AM
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#4 |
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Registered User
Join Date: Aug 2004
Posts: 5
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And in case you are not aware, the interest on the 401(k) loan is paid back to your 401(k) account, which makes 401(k) effective interest rate very low. If the nominal 401(k) interest rate is 8% and your tax bracket is 25%, the effective interest rate is 2%. You still pay a hidden expense because you are paying the interest using after-tax dollars, and after paying the interest to the 401(k), it becomes before-tax assets and is subject to tax again once you withdraw.
Check out this story: http://www.pfblog.com/archives/000295.html MM http://www.pfblog.com/ |
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08-26-2004, 10:10 AM
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#5 |
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Registered User
Join Date: May 2002
Posts: 7
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Loans are usually a bad idea. If you leave your employer, you have to pay the entire loan off as the balance immediately comes due. Otherwise it is treated as a disbursement and you pay all the penalities.
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08-27-2004, 03:26 PM
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#6 |
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Registered User
Join Date: Aug 2004
Posts: 8
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pfblog,
Thanks for the info. Very useful!! lalee |
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