Quick 401 K Question

I have always heard that there is a penalty for removing money from a 401 K for personal use. I have a friend who is going to “borrow against” (as he puts it) his 401k to buy a car. He says he is going to put the money back in installments over the next year. This does not sound right to me, what’s the scoop?

That is allowable in most 401K’s. You can take a loan out from it without penalty, and it’s repayed with automatic deductions from your paycheck, along with interest.

A withdrawal though can get you penalized up to 40% in taxes.

You can take loans on your 401K. Depending on who is running the 401K you can take 1 or 2 loans out. However if you don’t pay it back you have to pay up the wazoo in taxes. I think like 40%. That is whay you can never take more than half on a loan.

The catch, however, is that if you leave your job, you have to pay the loan back within a short period of time (30 days, IIRC). If you don’t, then it’s considered a withdrawl and gets taxed and penalized up the wazoo.

Zev Steinhardt

401(k) loans are a part of most 401(k) programs. The loan must be paid back on a reasonable schedule, and pay a reasonable rate of interest.

It’s a terrible idea, though, even in the best of times, and particularly bad when there are 0% car loans out there. If he doesn’t pay back the loan on schedule, penalties will be assessed.

Well, no bank is going to loan him the money for a 1957 Dodge something or other. He says it is a “once in a lifetime opportunity” I think his head is up his wazoo, personally, but whatever floats his boat. Hopefully the interest isn’t too high. This is the 2nd time he’s borrowed on this account–isn’t their a limit on how often you do this? I feel like this should be an “emergency only option”.