401K Loan- Do The Benefits Out Weigh The Penalties!?!?
Mar 10 '00 (Updated Apr 25 '01)
The Bottom Line 401k withdrawls are wonderful and very helpful, but with the taxes, it might be better to weigh out everything or plan ahead for this, before you actually go through it.
About 2 years ago, while experiencing some financial struggles, my husband and I were trying to find a way to relief some of the pressure of all our financial burdens. Things had become pretty tight, to say the least, and we were trying to look into all our options to make a change.
Well, through our search, we decided to get in contact with our Savings Fund Plan to see what they had available. We were pleasantly surprised to find what they had to offer. We learned that we could borrow against our own stock, and make monthly payments back to our selves. This was great!!! No High Interest rates, just putting the money back in to ourselves. We took a small loan and made the monthly payments. With no penalty's what so ever. It was great.
Then, earlier this year, we found ourselves in a very similar situation again, but this time we were a lot worse off financially. We had recently read in our Quarterly Savings fund plan how you are able to take out a Hardship Withdrawl for the amount that you have in your stocks. As much as we didn't want to have to do this, we felt as if this might be the only way out for us. We thought about it for a few weeks and then just figured we would go for it. We would lose all the stock that my husband had made over the 15 years that he had been with his company, but being that he is only 34 years old, we figured we had plenty of time to build it back up.
So, we made the call to find out information on taking one of these Hardship withdrawals. Well, we were told that they only let you take one of these loans out for one of the 3 following reasons:
1. Medical Reasons
2. Your House is in foreclosure and you are about to lose it.
3. You are buying a new house.
Okay, let me just say, They won't let us take the money out unless we are losing your house or terminally ill, yet they will let you take the money to buy a house!?!?!?! I just don't see the logic in that. But anyway, that were their rules.
Well, this got the wheels spinning!!! So, if we sold our house and paid off all our debt from the equity that we had in our house, we could then use the 401K loan as a down payment on new house. With doing this we realized we would be better off financially than we are right now!!! Well, that is all we needed to hear.
So we qualified for the withdrawl and we found a new house (a much larger one, I might add) and sold our current house. We are now still in the process of waiting for our new house to be finished! We are currently renters here! =o)
Everything seems like it was too good to be true! Well, you know what they say about that, "If things seem to good to be, then they probably are!" Well, during all this planning we failed to see the whole picture of the tax consequence from taking this withdrawl. Being that we took this money out in December it was filed in 1999 taxes. We thought we were covered because we paid 10% at the time of withdrawal and we thinking that would cause us to break even with taxes. We had always gotten a pretty good amount of money back every year, so we just thought maybe this year we would get none. Oh were we so wrong. =o( That 10% we paid turned out to be a drop in the bucket. We owed $4,500!!! Apparently, with this $28,000 withdrawl added on to our annual income, it brought us over the $100,000 a year income and therefore placed us in a different tax bracket.
So, I guess I wanted to share our experience incase it might help someone else keep in mind before taking a large withdrawl like this, the tax consequences and to be prepared for it. 401k withdrawls are wonderful and very helpful, but with the taxes, it might be better to weigh out everything or plan ahead for this, before you actually go through it. Don't be like us, and find out at the last minute and not be prepared! That was hard.
But Thanks to the Lord for coming through for us yet again, everything is working out just fine. And now we are eagerly awaiting for the finish date of our new home!
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