Since the 1980s, 401(k) loans have become one of the most common ways workers save money for retirement. The concept replaces the traditional corporate pension of yesteryear, which is especially useful for workers moving between industries throughout their careers. To summarize, the worker deposits money into the account, and in many cases, the employer matches the deposit. Workers are allowed to withdraw from the accounts after they’ve turned 59-and-a-half years old. They pay neither income tax nor tax on the interest on the money until they begin withdrawing it. If workers withdraw from them before they turn 59-and-a-half, they’ll pay a 10% early withdrawal penalty as well as income tax.
Due to the downturn, many people are finding it hard to access credit, and according to the Wall Street Journal, more and more of them are turning to their 401(k) accounts for loans. By 2011, up to thirty percent of 401(k) depositors have taken out a 401(k) loan, a record high. As the article points out, these loans are very tempting: the interest goes back to the account making it significantly cheaper than other types of loans, there’s no credit check and only a $75 initiation fee, and so long as the term of the loan is fewer than five years, there’s no income tax or early withdrawal penalty.
Tempting? Yes. A good idea? No.
- Those who lose their jobs have sixty days to repay the loan, or else it is considered an early withdrawal and the full balance will become due. Borrowers will pay an additional penalty if they are under 59-and-a-half. A sudden turn can make a bad situation catastrophic.
- Because these loans are only available to people who are still employed, they still have an income. In many cases, we’re talking about people whose spouses have lost their jobs and they’re trying to pay down bills. In these circumstances, it is much more reasonable to consider bankruptcy.
- For the most part 401(k)s are exempt from bankruptcy, and repayment of these loans is perfectly allowed in Chapter 13 bankruptcies. Because of the exemption, it’s a good idea to let the money sit there and deal with your credit problems through bankruptcy first. While we don’t generally advise it, you’ll probably be able to take a 401(k) loan after bankruptcy as there’s no credit check involved.
For Las Vegas debtors, considering bankruptcy before taking a 401(k) loan may be a far better solution to financial problems.
For more questions about bankruptcy in Las Vegas, please call an experienced Haines & Krieger Las Vegas bankruptcy attorney at 702-880-5554 for a free initial consultation.