Borrowing from a 401(k)

Your money

November 06, 2005|By ANDREW LECKEY | ANDREW LECKEY,TRIBUNE MEDIA SERVICES

I recently started my first real job after college. I'm participating in my company's 401(k) retirement plan but am concerned about locking up funds because I have little in savings. If an emergency comes up, how hard is it to access 401(k) money?

- D.B., via the Internet

You relinquish an important investment opportunity when you take out a loan on your retirement plan. About 80 percent of company 401(k) plans offer loans and 25 percent of eligible employees take them. Some firms permit loans only to pay for a family's education expenses, to prevent eviction from a home, to pay medical expenses or to buy a first-time residence. But nearly all plans will permit taking out money for extreme hardship.

"Once you have $2,000 in the plan, you'll likely be able to borrow back 50 percent of the balance to the legal limit of $50,000," said David Wray, president of the Profit Sharing/401(k) Council of America in Chicago. "You'll have five years to pay back the loan by payroll deduction only."

Most plans let you request a 401(k) loan through the Internet. Should you leave the company, you must immediately repay the loan.

Andrew Leckey writes for Tribune Media Services.

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