When is Borrowing from Your 401k a Good Idea?

Tax Act

While many financial experts claim you should avoid borrowing from your 401k as much as possible, it may be your only financial life line in certain situations.  Because so many people often don’t have enough or anything at all saved toward retirement, financial experts claim you could be setting yourself up for financial disaster when you are ready to retire.  On the other hand, depending on your situation, it may make sense to borrow.

If you have considered other financial options such as borrowing from friends, family or home equity line of credit, a loan against your 401k may be your last option.  An emergency that may be okay to borrow includes the need of living essentials such as food, grocery items and keeping utilities from being disconnected.  If you have other obligations or are being harassed by debt collectors for items such as medical bills or credit card bills, negotiate a payment plan that will give you time to make payments before considering using 401k funds to pay them off.

It you have a secure job it may be safe to borrow because it helps in repaying the loan amount.  You may have to consider payment amounts that would be applied to what you borrowed if they are automatically deducted from your paycheck.  Also keep in mind; you may be required to pay it back during a set time period. If you leave your job before the loan is repaid, you’ll have 60 days to pay what is due.  At this point, the money taken out may be subject to a 10 percent tax penalty.

You plan to use what you borrow for a smart investment.  This includes using the money to purchase a home, start a business or further your education.  For homebuyers, the repayment period is extended.  Make sure business decisions are thoroughly researched and educational credentials will have additional value for the workplace.

If you are unable to obtain a loan at an affordable rate, borrowing from your 401k may be a low-cost loan option.  People who have filed bankruptcy in the past, for example, may not qualify for a loan at a lower rate. Remember, you may still have to pay penalties for touching your 401k before your retirement age.  You may save interest in choosing to borrow against your 401k but it may not make up for taking the funds out in the beginning.

Andrew writes frequently about personal finance as well as issues effecting both consumers and small businesses, covering everything from credit cards to mortgages to tax reduction.

Whole Life Insurance for Retirement

Tax Act

Most people realize that some form of life insurance is almost mandatory these days. Given the costs associated with providing for any family’s needs, the death of one spouse can leave a deficit in the family budget that simply cannot be replaced without life insurance. Whole life is one of the most popular forms of permanent life insurance for precisely that reason: because it offers guaranteed benefits and cash value upon the policyholder’s death. That does not, however, mean that it is wise to just run out and buy the first prepackaged whole life policy that you encounter. There is a right way and a wrong way to buy whole life insurance.

The Wrong Way

Too many people take the simple route to purchasing whole life insurance. They select an arbitrary number – or have an insurance agent select it for them – and settle for a policy that provides that level of coverage to their heirs. This often leads to people being either over-insured or under-insured, and both present difficulties for policyholders and their families. Being over-insured may provide for larger benefits and cash payouts when you die, but such a policy also requires you t pay significantly higher premiums than you otherwise would. Being under-insured may not present you with any immediate difficulties, but it is guaranteed to leave your family without the necessary resources to maintain a consistent lifestyle when you are gone.

Doing it Right

Obviously, purchasing whole life insurance properly entails more study and research than most people assume to be necessary. The first step is to sit down and realistically determine what your family will need when you pass away. Take into account the home mortgage, college for the kids, and any other anticipated large expenses that are likely to occur in the future. Remember, your whole life insurance policy is designed to help the family maintain a certain standard of living if you die.

The next step involves making sure that you insure the most pressing needs first. You can always add to your whole life policy as time passes and new needs arise, so concentrate on those pressing needs now with the recognition that you can modify your coverage when your situation changes. Few of us have all of the resources we would like to have to protect against any possible loss, so always begin by doing what you can do now. Always remember that the best life insurance policy is the one that you can could on no matter what.

Keeping Pace with Life

Your whole life policy should be subject to your personal review on an annual basis, so that you can keep your coverage updated as your life changes. The most important thing that you can do to help you make those updates is to partner with a life insurance company and agent that you trust. Assuming that he or she is competent, the agent will be your best resource in maintaining a whole life policy that continues to meet your needs as the years and decades pass by. Best of all, you can ensure that your policy covers everything that it needs to cover, without being excessive.