borrowing against a 401k?

My brother got into some trouble with the law. He needs money now to pay an attorney & quite possibly a fine. We are thinking around $8,000.00 Could he take it out of a 401k? I hate to see him borrow money or worst, charge that much on a credit card. Any suggestions? Thanks

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  • jon b
    Lv 4
    1 decade ago
    Favorite Answer

    Borrowing from a 401k plan is not that bad of an idea in an emergency situation. The money is yours, and it is pre-tax dollars. Your loan will charge interest - which you are paying to yourself. There is sometimes a fee to initiate a loan, depending on our 401K provider - it should be reasonable, enough to cover doing the paperwork.

    While the money is not in the plan, it is not participating in the investments of the plan. For example, say your 401K has $25,000 in 3 different mutual funds and they are all up 10% next year. The money that you have out on loan won't participate in that gain. (However, it won't participate in a loss either!).

    Taxability of loan proceeds. If you take out a loan, and pay it back in even payments, or in a single lump sum as agreed by your 401k provider - a loan is a NON-TAXABLE event. Most employers will set up an automatic payroll deduction that pays the loan off in the amount of time the plan allows. You can't send in extra payments to get the loan down faster, and skipping a payment will usually automatically trigger default - however, you can call and get a payoff and pay the whole thing off early.

    If you don't pay any or all of the money back as agreed - you don't ruin your credit (it's your money - are you going to call yourself to collect?) however you do trigger taxes. You will be taxed as regular income any part of a loan that is not repaid plus a 10% IRA penalty.

    Many statements above are sweeping generalities based on my past experience - your 401k plan administrator will have further details associated with your exact company plan which may differ.

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  • 1 decade ago

    out of experience... 401K is YOUR MONEY... Yes its used for retirement but if you need it, Why not use it.

    In order to have atleast 8,000 you would have to get around a 12,000 401K Loan... Only because you do Get Taxed on it.

    People are going to Tell You its not a good Idea... But if you need it, go for it, the only thing with taking money out of your 401K is that you get FINED for taking money out of your 401k too Soon, that means youll have to pay another 1,000 to 1,500 which will be applied to the already 12,000 to pay back within a 4 to 6 year Period.

    Truthfully its been 5 years since the last time i borrowed money from my 401k, and I paid it off in 3 Years (10,000)

    For 2008 I plan to take out atleast 20,000 to get a 2 good Cars for me and my Husbnd and pay off some Credit Cards.

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  • Anonymous
    1 decade ago

    He can take out a loan on his 401K. This is good because he will be paying most of the interest back to himself. But, there are some things to worry about. If he loses his job, the entire amount will become due. If he can't pay, he will be taxed on the amount of the loan. Then the IRS will be after him for the the taxes. If he can't pay the IRS, he'll be in even bigger trouble.

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  • aashis
    Lv 4
    3 years ago

    Please look someplace else for the money. i do no longer believe there's a stipulation on borrowing (back) whether it fairly is a undesirable financial pass. Joe Schmuch you artwork with will say what very much it fairly is "pay your self the pastime". do no longer purchase it. you're dropping the ''compounding pastime'' by ability of taking from the finished stability and decreasing it. in case you pass away your interest and could rollover the 401k you have got ninety days (i think of) to pay it back or you're able to desire to declare it as earnings and pay one extra 10% penalty. 25% to 40 8% ability loss, no longer me. solid success.

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  • 1 decade ago

    The disadvantage to borrowing from your 401(k) is that you pay it back with after tax money and then when you retire you are going to have to pay tax again on the $8,000.

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