Make a 401 (K) Money-Back Plan
This spring, Congress passed the CARES Act for the Affected by the Pandemic. The historic bill has several provisions for those facing financial hardships, including those looking to get loans from their retirement accounts . The new rules provide temporary access to your 401 (k) with fewer penalties and restrictions. If you’ve borrowed 401 (k) money, you may be starting to think about your payout strategy. If you’re worried about job security or lost earnings, it’s important to develop a plan. Here are some things to consider before making payments.
Know the rules
Before paying off your 401 (k) loan, it may be helpful to know the rules. CARES increased the limit for 401 (k) loans from $ 50,000 or 50% to $ 100,000 or 100% of your personal balance. You still have five years to pay off your 401 (k) loan, but the new rules allow one year to be delayed.
“Borrowing from your 401 (k) can be risky, so be sure to consider all your options,” says Leona Edwards, asset management manager for Mariner Wealth Advisors in Nashville. If you lose your job or decide [to work] elsewhere, you may have to pay off the entire balance on your 401 (k) loan. If you cannot do this, the loan becomes part of your taxable income, along with a 10% early withdrawal penalty.
You will also have to pay interest on the 401 (k) loan. According to the IRS, interest rates can’t be better than a similar bank loan, but interest goes back to your 401 (k).
Refinance your mortgage
If you are running low on money and looking to pay off your 401 (k) loan, it might be worth considering refinancing your mortgage . Edwards believes that 30-year interest rates are at an all-time low and this could be a good opportunity to raise home equity. “However, you should consider closing costs,” she says, which can range from 2% to 6% of your loan amount.
Apply for a line of credit
Another way to leverage your home equity is through the Home Equity Line of Credit (HELOC). He may suggest a 10-year repayment term that is longer than the 401 (k) loan repayment deadline. However, this is not a risk-free option. “You could lose your home if you can’t afford the HELOC payments,” Edwards warns.
Suspend college savings plans
Parents who are procrastinating for college may consider temporarily putting their plan on hold. If your kids are younger, you may have plenty of time to rethink your college savings options. “A 401 (k) priority loan can help you avoid taxes and fines,” says Edwards.
Consider the opportunity cost
Another reason to pay off your 401 (k) loan? This gives you more time for your money to grow. The sooner you pay off the loan, the more opportunities there will be for tax-free growth. A few years of absence from the market may seem small, but it can amount to thousands of dollars in lost future profits. You can enter your loan details into the compound interest calculator to see for yourself the impact of the earlier repayment.