There are other facts to consider when deciding whether or not to take a loan on a retirement plan. When paying the loan, all payments, plus interest, go directly into the 401k rather than to a third party lender. The typical interest rate for a 401k-plan loan is the “prime rate” as specified by the Wall Street Journal on the loan date. To find the prime rate on the day of the loan, get a copy of the Wall Street Journal and simply check.

When receiving a plan loan, pay, you have many options. Our self employed clients who have their self directed 401 k plans may receive regular pay checks or irregular commissions. If you have a regular pay check pay the loan conveniently by having that money easily deducted from your check. If you have irregular pay periods, a payment can be made every 90 days. In either case the payment must be a blend of principle and interest and must be paid back within 5 years.

When taking a loan from a 401k plan, it is a loan, so no early withdrawal penalty is involved. There is no need to worry about that early 10% withdrawal penalty since it is not a distribution. Whenever applying for a 401k loan, one’s spouse will have to sign a form to acknowledge they are aware that funds are being borrowed against a retirement account. At Self Directed Retirement Plans our prototype 401 k plans include the appropriate loan forms.

The Pros of Taking a 401k Account Loan

• No credit check: Can’t get a personal loan due to either bad or no credit? That will not be an issue with a 401k-plan loan. The account is already fully funded.

• Low interest: Interest established for the loan is set at the prime rate at the time of the loan close.

• No Restrictions: Generally no restrictions on the purpose for which one may borrow.

• No early withdrawal penalty: This is not a distribution. It is a loan.

• Payments return directly into the 401k: Structured loan payments go directly to your retirement plan, with interest.

• Tax Shelter: The interest paid back is not taxable. There are no taxes on interest paid back into the account until retirement age. Taxes are not due until funds are actually distributed

The Cons of Borrowing from a 401k

• Opportunity cost: Removing money from a retirement account diminishes its’ ability to earn interest (greater than the interest you are paying) from external sources until it is returned to the account.

• Reduced Contributions: Loan re-payments go back to your own 401k account so unless your income and contributions have increased, the borrower is likely making smaller contributions to the plan because income is tied up in a loan re-payment.

• Default distribution: If a 401k loan goes into default, the loan becomes a distribution. Taxes and penalties are due that year. If the borrower is under the age of 59 ½, there is an additional 10% early withdrawal penalty.

• Unexpected loan default: If a self-employed borrower goes out of business or the plan is closed with an outstanding 401k loan, that loan is due immediately. If the borrower cannot pay the loan, it is considered a distribution, and income tax is due on it in that year.

• Non-deductible Interest: Interest paid on the loan is not deductible.

Once the decision is made to take a loan from your qualified plan, simply complete the loan forms.

Once the forms are completed, make and keep a copy for tax and personal finance records. Always make sure to keep these records in case asked to show the IRS. The Internal Revenue Service will want to ascertain that the borrower is acting in accordance with the rules of the plan. Simply write yourself a check from your 401k checking account for the loan amount and remember that there are 5 full years to pay that back.

For answers to any questions any questions, speak with a CPA or a tax professional. If you have any questions for us you can go to our website, which is www.sdretirementplans.com or you can call us at 1-866-639-0066.

The Do’s

1.Do take part in your plan

If your employer has set up a 401k plan for you at workplace, start contributing to it. Bank of America Merrill Lynch states contributing to a workplace 401 k plan is one of the best was to improve to improve your financial well being. To save and invest drives financial wellness. The plans that see participation from 80% of eligible employees are the healthiest. Such 401k plans have self-triggered enrollment for eligible employees; auto increase, wherein regular automatic upward adjustment for the salary percentage contributed by employees takes place. Workers also receive prudent investment advice.

2.Do shun risky behavior

There are patterns that constitute risky behavior that should be avoided. The following are some behavior patterns to look out for: personal 401 k loans exceeding to 25% or greater of the entire 401k account balance and not using the professional advisor’s experience to establish an investment strategy. Other factors to be wary of are; not taking advantage of asset allocation or target date funds, too narrow a focus in particular asset classes including company stock and failing to take complete advantage of company match. Contribution rates of less than 2% are another danger signal.

3.Do raise the contribution rate

You should attempt to raise the contribution level in your 401k plan. The healthiest 401k plans see an average contribution of 8.5% from workers. Experts comment that a mere increase of 1% or 2% of salary contribution can dramatically impact your retirement savings.

4.Do overcome inertia by putting the plan on autopilot

Sloth is bound to get the better of us even if we experience a pay raise. You should take advantage of the automatic escalation and automatic rebalancing tools offered by employers to up your contribution to 401k.

5.Do use expert advice

401k plans which offered counseling to participants saw the schemes fare relatively well than the plans that didn’t. The benefits of advice are undeniable. Researches show that employees who seriously took and implemented investment help had better annual returns. You should delegate account management to external professionals if offered by employer.

The Don’ts

1.Don’t give away free money

Do not keep your contribution to 401k plan less than the match provided by employer. You should adequately contribute to take full advantage of the employer match.

2.Don’t take your cash out

If you have moved out of your current job or are contemplating such a move do not take the money out of your 401k savings in the form of a distribution. The research conducted by Hewitt indicates that on an average 46% of employees tend to cash out in such circumstances. If you are planning to do so, you should be aware of the tax consequences and long term harm to your retirement plans. In most cases, any distribution before the age of 59 ½ will result in an IRS 10% SURCHAGE on top of the income tax due. For example, you change jobs and have $50,000 in your company plan. This money has never been taxed. If you decide to take a distribution, it is the same as adding an additional $50,000 to your income for that year and in most cases will push you into a higher tax bracket. So you will get hit with a higher tax rate PLUS the 10% IRS penalty. On average you can lose 40% of your retirement funds AND they can never grow again in a tax-deferred manner. In most cases this is not a prudent decision, once again
stressing the importance of using an experienced tax professional or financial advisor.

3.Alternatives to taking a distribution.

A company 401 k plan is a “qualified” plan meaning the contributions are pre tax and the growth is tax deferred until a distribution is taken. There are other “qualified” plans available to persons changing jobs and in a lot of cases make much more sense. The most common approach and the one most financial advisors recommend is to “roll over” or “transfer” the 401 k monies into a traditional IRA. There are many IRA custodians who are more than ready to help you do this. The two biggest advantages are: your money is no longer in your company’s plan (with limited investment choices and the chance the company can fold) and your new custodian will have many more investment options. Rollovers or transfers are not a taxable event – you were simply moving from one qualified account to another.

4.Don’t put too much money in company stocks

If you are investing too much in company stocks, you are essentially tying up your financial capital and your human capital to your employer. In the event of financial ruin coming down on your employer, you run the risk of losing a significant portion of 401k investments apart from losing your job. Market analysts recommend that one should restrict the investment to 10% of your 401k plan to company’s stocks. Currently, the trend for most employees is 18% of their company 401k money invested in employer’s stocks.

At Self Directed Retirement Plans LLC we help clients with these decisions every day. Generally, moving your old 401 k money into an IRA is a good idea. There are many good custodians eager to help. However, we take the extra step and create totally true check book controlled self directed IRA’s for our clients. This opens up the whole world of alternative investments such as real estate, tax liens, precious metals etc. It is important to seek experienced advice when moving your old 401 k. We do not have products to sell, our specialty is establishing a qualified plan which allows our clients to really have all the legal investment options allowed.

Consolidate your retirement earnings with Self-Directed IRA

A True Self directed IRA allows you to take charge of your retirement. If you decide to invest in real estate under the umbrella of this financial instrument, you take control. It has the potential to make returns that have historically surpassed gains by traditional investment vehicles like bonds, mutual funds and stocks. Remember the adage “they are not making any more land”.

A Self directed IRA is the ultimate tool to secure a handsome income for your retirement. Real estate investors can utilize the IRA funds for investing in real estate, trust deeds, mortgage deeds, notes and tax lien certificates among a plethora of options.

Reap benefits by investing in rental property

The cost of purchasing single, multi-family and commercial real estate houses has plummeted in the last five years. Different areas of the country have experienced price reductions from 20 to over 60%. These significant reductions have reinforced the rental market. Job losses, foreclosures and short sales have had the effect of putting more people in the rental pool. In a lot of cases these are good people who will be good tenants while they rebuild their lives.

Single-family homes are relatively cheaper and the earning potential has been bolstered by low interest rates, and affordable prices. Managing tenants is not as scary as it sounds and there are many quality management companies to relieve you of this burden at reasonable fees.

Joint venture real estate investment

Investing in real estate for passive investors is another avenue for nice returns. If you are in possession of funds to put in real estate and let your money do the work for you, then joint venture real estate investment is the perfect investment platform for you. You can collaborate with a seasoned real estate professional and can make the joint venture work wonders for you in terms of awesome returns and sustained cash flow.

A professional investor can help in locating and acquiring properties. They have the experience and want to combine that with your IRA funds. Depending on the part of the country, the discounts can be extraordinary. Repairs can range of course but the real estate professional should be able to give you reasonable expectations of cost. They should also take the time to calculate the “exit” strategy.

As example to think about: A typical three bedroom, two bath in a nice neighborhood should rent for $900-1000 per month. Expenses such as insurance, HOA’s and taxes have to go into the equation of course. Assuming your Self Directed IRA paid cash, you would be free of interest and mortgage insurance costs. Your profit after expenses has the potential to out perform traditional investments AND this does not take into account the appreciation factor. The appreciation will be realized when you sell the property and is nice icing on the cake.

If you have struck a deal of 50/50 split with your professional joint venture partner, you will share monthly income and future gains due to the appreciation.