Stacey just sent me an article from the Wall Street Journal that talks about an increase in 401(k) loans. 401(k)s and their cousins, 403(b) and 457 plans, can offer loans to participants. The cost of the loan is generally something like the prime rate plus a percentage or two. Even better, the interest charged normally goes back into your account. Looks great, right? Well, the article quotes my good friend and former boss, Bill Arnone, a partner at Ernst & Young. Bill talks about the hidden double taxation of loans like this. You see, money you put into a 401(k) is usually pre-tax. You do not have to pay tax on your contributions. It’s one of the great advantages of these plans. But when you take out a loan, you have to pay the money back after taxes are taken out. Then you pay taxes again when you withdraw the money in retirement. Who wants to pay taxes twice?
401(k) Loans
October 10th, 2007 · 2 Comments
Tags: Personal Finance
2 responses so far ↓
1 eric // Oct 25, 2007 at 12:01 am
So… how can you access the $$$ in 4o1K without paying a penalty. And… what are the penalties for early withdrawal?
2 paula // Nov 9, 2007 at 10:45 am
If you take out a loan on your 401(k) or your 403(b), you are not paying a penalty. You are just paying back a pre-tax contribution with after-tax dollars. If you withdraw the money, there is generally a 10% penalty for early withdrawals from these plans, plus any tax due. You should talk to your plan administrator about the specific details of your plan and your situation.
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