Debt Consolidation Credit Counseling In Phoenix

Almost nobody needs a 401k retirement plan. That said, some people are convinced that these things are not tax traps and that somehow everything will work out just fine.

If you are the type of person who is convinced that their 401k plan is doing good things for you (and will continue to do so), you might as well get the most out of it. You can do that by just leaving it alone. Don't loan money out of it. Don't even think about borrowing from it for any reason.

First, when you take a loan from a 401k, it's not really a loan, per se. You are withdrawing funds from the plan. Since they aren't in the plan, they are not invested. The investments had to be liquidated so that you could have the money.

Bonds represent a fixed investment. The amount of the return is known in advance. You are lending either a corporation or the U.S. Government money in return for interest plus the return of your principal.

However, when you loan money to yourself from your 401k, you are simply replacing the interest you would have been getting from either an investment in another company or from bonds. Since the money is not in your account, you're just getting the interest based on what you pay back into the plan. You've effectively swapped the source of interest, not added to it.

Additionally, the interest you do pay on your 401k loan is subject to double taxation. Why? Because the money is after tax money not subject to the same rules as the original contribution. This is a "double hit" in terms of taxes that you are going to be forced to pay as part of your participation in the plan.

Every time you take a loan from your 401k plan, you repeat the process of building up funds that will be taxed twice. This is incredibly unfortunate and necessary. The gimmick of the plan (the tax savings) can then become nullified through even moderate borrowing throughout your lifetime. This is on top of the regularly required taxes on distribution.