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Do you know that feeling when you’re on a stroll and you find a crisp $20 bill on the ground? You say the customary, “Is this anybody’s cash?” (because you’re a decent human being), and all you hear is sweet silence. It’s a feeling we don’t feel quite as often in a mostly cashless world, but I’ve discovered the next best thing–finding work benefits I never knew I had.
Since my company made the switch to Pendant, I’ve discovered several benefits I didn’t know I had, but today I’m focusing on one: Borrowing cash from your 401(k) retirement fund.
Ask any financial advisor and you’ll pretty much always get the advice: do not take out your retirement investments prematurely (lest you incur taxes and early withdrawal fees). But what if you’re in a situation where you need cash now to pay for medical bills, or maybe you bought a fancy Tesla you can’t really afford? Listen, we all make mistakes, and the Pendant blog is a SAFE space for financial foibles.
Anyways, if you need some cash now, and you don’t want to take out a high-interest loan from some shady cash lender, allow me to share my discovery about borrowing money from your 401(k) retirement fund.
Off the top, I want to say that not every 401(k) plan allows you to borrow money from your retirement savings, but thankfully most do. A quick Google search revealed that major investment companies like Fidelity, Charles Schwab, and Merrill Lynch do allow you to borrow money from your 401(k), so chances are, whoever houses your 401(k) will allow you to take out a loan.
It’d be nice if you could just roll up to the bank and declare “I’d like to borrow money from my 401(k)!” a la Michael Scott in The Office “declaring” bankruptcy. There are a few rules you need to know about before you start the process:
In other words, you can’t borrow anything from your 401(k) until that money becomes yours. Your employer will specify how many years you need to make contributions to your 401(k) before you gain ownership over the funds. For example, your employer might set a schedule like this:
You can only borrow money that has vested, so you’ll likely need to work at the same company for at least a few years before you have access to your retirement funds.
You can either borrow $10,000 (if you have that much money vested) or 50% of your vested retirement balance, whichever is more, but only up to $50,000.
So, if you have $12,000 vested in your 401(k), you could borrow $10,000. If you have $32,000 vested in your 401(k), you could borrow $16,000. This is fun, let’s do one more. If you have $120,000 vested in your 401(k) you can borrow….$50,000!
While you do have to pay back your 401(k) loan, the good news is that you will get a lower interest rate than you’d ever get from a credit card company or quick-money lender. Typically, the interest rate on a 401(k) loan is the prime rate plus 1%-2%. As of writing this article, the prime rate is 8.50%, so you would likely be looking at a 9.50%-10.50% interest rate on your 401(k) loan.
Considering that the average interest rate for a personal loan sits at 12.38% currently, you get a much better deal with a 401(k) loan.
All of the interest you pay goes back to your retirement fund. I couldn’t believe that when I read it on my company’s Pendant page about 401(k) loans. Instead of all that extra money going to a bank or credit card company, your interest payments go right back to your retirement!
Assuming you pay back the loan in the agreed upon timeframe, you won’t have lost a single dime out of your retirement fund.
It basically boils down to this: If you’ve been investing in a 401(k) for a while and you want a low-interest personal loan, a 401(k) loan is absolutely the way to go. Again, I never would’ve known about this company benefit had it not been clearly stated on my company wiki housed on Pendant.
Let’s just say that a certain someone is going to be able to keep their Tesla after all!
