![]() That repayment period can be extended if you use the loan to purchase a home. Typically, 401(k) loans must be repaid within five years. The good news, though, is that you are paying interest to your own 401(k) account. Your plan's administrator determines the interest rate, but it must be similar to the rate you'd receive when borrowing money from a bank. However, they're like other types of debt in that you must pay interest on the amount you borrow. There's no credit check, and applications are typically short. Unlike personal loans and home equity loans, 401(k) loans are usually easy to get. Most 401(k) plans allow participants to borrow their own money from the plan and repay the loan through automatic payroll deductions. However, if you really need to access the money, you can often do so with a loan or an early withdrawal from your 401(k) - just remain mindful of the tax implications for doing so. ![]() As such, the tax code incentivizes saving by offering tax benefits for contributions and usually penalizing those who withdraw money before the age of 59½. Retirement accounts, including 401(k) plans, are designed to help people save for retirement. But how do you know which is right for you? And what are the tax consequences you should be expecting? A 401(k) loan or an early withdrawal? If you understand the impact it'll have on your finances and would like to continue with an early withdrawal, there are two ways to go about it-cashing out or taking a loan. However, before you consider this option, be forewarned that there are often tax consequences for doing so. If you need money but are trying to avoid high-interest credit cards or loans, an early withdrawal from your 401(k) plan is a possibility. You’ll also have to pay a 10% penalty on the amount withdrawn if you're under the age of 59½. An early withdrawal from a 401(k) plan typically counts as taxable income.The interest you pay on a 401(k) loan is added to your own retirement account balance.Money borrowed with 401(k) loans aren't considered taxable income, so you won't have to pay taxes on the amount you borrow.However, these payments will reduce your take-home pay. Most 401(k) plans allow participants to borrow money from the plan and repay the loan through automatic payroll deductions.By signing up with Personal Capital for free and aggregating all your accounts in one place, you'll be well on your way toward financial independence. We also strongly recommend fee-only financial advisors, so you know how much you're paying up front and avoid advice with conflicts of interest. As you may know, we always try to avoid fees whenever possible. Though you must create Personal Capital login credentials to use them, you don't need to enroll in Personal Capital's advisory service. Our favorite financial management tool is free to use and take less than a minute to sign up. Run various retirement planning calculations with their amazing retirement calculators.Analyze your investment portfolios for proper asset allocation.Analyze your investment portfolios for excessive fees (this is especially important early on in your FI journey).Track and manage your income and expenses.We love the free features Personal Capital offers, including the ability to: We believe that Personal Capital is the most comprehensive free financial tool you can find online to manage your finances and track towards your FI date. Now that you’ve calculated your time horizon to financial independence, we strongly encourage you to start tracking your money.
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