When facing an urgent and substantial financial need, borrowing against their 401(k) often comes to mind. While account holders can withdraw $50,000 or 50% (whichever is less) from their 401(k) plans without paying penalties, there are major drawbacks that should make you think twice about getting a 401(k) loan.
One con is that if you leave your job or are fired from your current employer, you’ll need to pay back the loan or face taxes and penalties on it. Also, your 401(k) may not qualify for getting a loan. If your retirement plan is from a company that you no longer work for, and you didn’t roll that old plan into your current 401(k), you won’t be able to access any funds from your old retirement plan.
It’s also common for people to stop making contributions after a withdrawal which sets them back even further.
The good news is there are alternative ways to raise money without having to access your 401(k) prematurely.
A home equity loan is a low-interest loan that allows you to borrow against the equity you have built up over time. Most lenders would require that you have at least 20% equity to qualify for a home equity loan.
This means keeping your retirement money safe while meeting your current cash needs.
Personal loans are another alternative. The good thing about this option is that no collateral is involved in securing the loan. However, interest rates are typically higher than other options because no collateral is used.
Refinancing your mortgage and taking cash out at closing can provide the funds you need during a crisis. This is a good option since you take out a low-interest loan to get the cash you need.
Have you been getting offers for a 0% credit card balance transfer? This may be the right time to take advantage of the deal. This strategy can give you immediate access to funds when needed, which is better than making an early 401(k) withdrawal.
Note that the 0% APR period can range from 9 to 18 months, depending on the provider. So make sure you can pay the entire credit card balance before this period ends. Failure to do so puts you in a position with high-interest debt once more.
We understand that life sometimes throws a curveball, and you suddenly find yourself in a situation where you need a large sum of cash –fast. Due to the pressure, an early 401(k) withdrawal is among the top options considered.
Saving for your retirement requires a long-term commitment, and paying a 10% penalty for accessing your retirement money may be a considerable price to pay, even for a financial emergency. Consider taking out a 401(k) loan as a last resort since there are alternatives that can fund your financial needs.
If you are in a true financial bind and have no other option but to tap your retirement accounts, proceed cautiously and consult with a financial advisor that can help you avoid costly tax traps and penalties.
However, we urge you to explore a home equity loan or cash-out refinance instead. Curious to learn more? Contact us for an obligation-free assessment to see if you qualify.
We've been helping customers afford the home of their dreams for many years and we love what we do.
Company NMLS: 279168
11040 W. Blue Mound Road (211)
Milwaukee, Wisconsin 53226
Phone: (414) 431-3111
U.S. MORTGAGE CORPORATION strives to ensure that its services are accessible to people with disabilities. U.S. MORTGAGE CORPORATION has invested a significant amount of resources to help ensure that its website is made easier to use and more accessible for people with disabilities, with the strong belief that every person has the right to live with dignity, equality, comfort and independence.
U.S. MORTGAGE CORPORATION makes available the UserWay Website Accessibility Widget that is powered by a dedicated accessibility server. The software allows 2usmortgage.com to improve its compliance with the Web Content Accessibility Guidelines (WCAG 2.1).
U.S. MORTGAGE CORPORATION accessibility menu can be enabled by clicking the accessibility menu icon that appears on the corner on the page. After triggering the accessibility menu, please wait a moment for the accessibility menu to load in its entirety.
U.S. MORTGAGE CORPORATION continues its efforts to constantly improve the accessibility of its site and services in the belief that it is our collective moral obligation to allow seamless, accessible and unhindered use also for those of us with disabilities.
Despite our efforts to make all pages and content on U.S. MORTGAGE CORPORATION website fully accessible, some content may not have yet been fully adapted to the strictest accessibility standards. This may be a result of not having found or identified the most appropriate technological solution.
If you are experiencing difficulty with any content on U.S. MORTGAGE CORPORATION website or require assistance with any part of our site, please contact us during normal business hours as detailed below and we will be happy to assist.
If you wish to report an accessibility issue, have any questions or need assistance, please contact us by sending an email to: email@example.com