Borrowing from a 401(k)
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August 1, 2000: 11:27 a.m. ET
Nearing retirement with payments due, is your 401(k) a good loan source?
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NEW YORK (CNNfn) - Faced with a house payment and taxes, a 60-year-old reader withdrew money from his 401(k). Now he finds himself in need of more capital and in danger of suffering penalties on that early withdrawal.
In response to a reader's question, Scott M. Kahan, a certified financial planner from New York and a member of the Financial Planning Association outlined options for paying down the debt.
Ask the experts a question
I borrowed $50,000 of my 401(k) to pay off bills, etc. After a few months I got transferred with my job and had to purchase a different home, which put me back to making a fairly large house payment. I am going to be 60-years-old in May. I need some of the money I am paying on the money I borrowed from my 401(k) to help with the house payments. Do you have any suggestions on how I should proceed?
I have a good retirement coming when I decide to retire, but I only have around $200,000 in my 401(k). I have thought about taking out enough to make my house payment for the year. Also, should I take out what I can and roll it over into an IRA instead of leaving it in the 401(k) plan?
Since you are still with the same company you may not have many options here. If you stop paying the loan, the loan proceeds will be subject to tax and possibly a 10 percent penalty if the funds were borrowed before age 59-1/2. Also, your company may not allow you to stop paying the loan. As an active participant, you can only pull out more than $50,000 if it is due to hardship. While making house payments does not qualify for a hardship withdrawal, avoiding foreclosure would. Hopefully, that would not be an issue here.
If you are still funding your 401(k) plan, you may consider not funding it and only continue to pay the loan payment. But you may be forfeiting matching contributions. If you were to leave your job, you would need to pay the loan off to avoid taxes, but could then rollover the proceeds into an IRA and withdraw them out subject to tax, but not the 10 percent penalty since you are over 59 1/2. Assuming that you are staying put, your options are limited and you need to do some careful budgeting or look to downsize your house. But in either case you should look at your retirement and see how any current decision will impact your future income.
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