Taking out a loan against your 401K is usually a less expensive option than a straight withdrawal where you may have to pay income taxes and a 10% penalty, however there pitfalls that you must take into account.
Most plans will give you only five years to repay the loan. If you borrow a large amount the payment could be substantial.
If you fail to make the payments or leave your company you may be required to pay back the outstanding balance within 60 days or be forced to take it as a hardship withdrawal that will incur taxes and penalties.
Make sure you understand all of the consequences of borrowing against your 401K.
If you will be traveling you probably do not want to be stuck without having a way to pay for your purchases.
Making purchases outside of your normal pattern can trigger suspicious activity on your account often resulting in your account being frozen until they can reach you or in a worst case, if your card is compromised leave you without the use of your card.
To minimize any disruption it is always a good idea to notify your financial institution of your travel plans before you leave.
It’s always a good idea to have a couple of different payment options just in case.
Before you decide to apply extra income to your mortgage or refinance to a shorter term, here are a few things to think about:
Are you taking full advantage of your employers company match on your workplace retirement plan?
Do you have other debt?
How about your emergency fund? Would you have the saving to get you through an un-expected expense or loss of income?
With the tax advantaged treatment of mortgage interest that you may decide that the effective interest rate is low enough that you can obtain a higher return somewhere else.
At some point you may turn to a financial advisor for help with your retirement plan. How can you ensure that you find a planner that will have your best interest in mind?
Start by identifying a couple reputable companies and meet with an advisor from each to describe your situation. Find out what their qualifications are and if they have the experience and skills to help you. You want someone that is a good fit for your particular situation. You can do a background check at FINRA.org.
Last but not least, the advisor should be able to tell you how he or she will be compensated. Is the advisor paid on commission based upon the types of investments you have or are they a salaried employee? Either way this is a long term relationship so take your time.
If you have a son or daughter, at some point you may be tempted to tap into your retirement account or reduce your future contributions to help them pay for college but doing so puts your retirement savings at risk. In retirement who is going to help you out?
To borrow a phrase from the aviation industry, put your oxygen mask on before helping others.
This does not mean that you shouldn’t help. They still need your advice and guidance.
If you still have time on your side consider opening a 529 plan for your son or daughter. Get started as early as possible and exhaust all grants scholarships and federal student loans before turning to private loans.
Another consideration is to start at a community college and then transfer to a four year program.