Borrowing From Your 401 K

Many Americans have taken to borrowing from their 401K plans and other retirement plan accounts to survive in this current economic climate. According to Fidelity (a top provider of workplace retirement plans) approximately 15% of 401K participants took loans from their accounts and 22% of those participants have loans outstanding carrying an average balance of $8,650.00.Now, borrowing from your 401K (Retirement Plan) may seem like a sound idea (many have no choice) and it can be. Unfortunately, what most fail to understand is how to deploy those funds correctly. Several years ago after repeated blows to the head (figuratively), I finally understood what my business coach had tried so desperately to engrain into my old school noggin: Live on a little less and re-invest the rest; maximize your money by increasing the velocity at which it grows. LIGHT BULB!Even with a traditional 401K (as opposed to a Roth or Self-Directed which I learned about soon after) it is possible to generate a favorable return, despite the fees, penalties, and taxes. Real Estate was the key for me. By now the world knows (consider the throngs of foreign investors buying up the U.S. for pennies on the dollar) there has never been a better time to capitalize on the U.S. housing market. Using proven strategies that have stood the test of time, you do not have to settle for simply surviving.Granted it is imperative you surround or align yourself with those that have the knowledge, expertise and systems in place to guide you and mitigate the risk. Deployed properly, in most cases you will experience significant returns, dwarfing those of standard investment vehicles such as CDs and other Retirement Plans relying on the stock market for instance.Prior to borrowing from your 401K consider other sources of cash or ways to cut expenses. If you have a whole life insurance policy you can borrow up to the full cash value and you wont have to repay it. You can withdraw contributions from your Roth IRA tax free and penalty free under certain circumstances (check with your financial/tax advisor); or take that Roth and convert it to a self-directed version for ultimate check book control. In the event you must borrow from your 401K here are a few things to be aware of:You will have to pay the loan back in 5 years, except for home purchases which are eligible for a longer period.Most employers deduct loan repayments from your paycheck!You will have to pay interest, usually prime plus 1 or 2 points. The interest you pay does go back into your account; however, it may not be free though. If your fund is earning 8% as an example and you borrowed at 6% you lose points and the future compounding interest on the lost points.Default wont hurt your credit score, but you will owe income taxes, plus 10% early withdrawal penalty (if you are less than 59 and a half years old and still working).If you quit, or lose your job, you will have to pay it back typically within in 60 days. If not the money will be treated as a distribution, subject to federal and state taxes and 10% penalty if you are less than 55 years of age.