401(k) loan and hardship withdrawal limits have been updated in response to the CARES Act recently signed into law.
CARES Act 2020 401k Loan Updates
Effective March 27, 2020, you can take a loan of up to the lesser of $100,000 or 100% of your vested 401(k) Plan account balance, and you can suspend loan repayments for a new or existing loan through December 31, 2020. You also have the ability to take a hardship withdrawal from the 401(k) plan that is exempt from the normal 10% early withdrawal penalty and repayable within three years.
There are many pros and cons of using a 401k loan to pay off credit card debt:
Benefits of Taking a 401k Loan or Hardship Withdrawal
Some of the Pros of taking 401k loans and hardship withdrawals include: Instant capital can be received from your 401k retirement account with very minimal effort. Most 401k plans offer online 401k loan requests that can get you money within a matter of a few days with no credit checks, impacts to your credit, or a lengthy application process. Another benefit of 401k loans if that fact that the money can be used for anything, although it is highly suggested that you create a plan for how to use a 401k loan properly to get the most bang for your buck. Eliminating high-interest debt, especially high-interest credit card debt is one of the best uses for 401k loan distributions.
Drawbacks of Taking a 401k Loan or Hardship Withdrawal
Some of the Cons of taking 401k loans Include: Since the funds to repay your 401k loan come directly out of your check, when you pay back your 401k loan, you are paying back the loan with after-tax funds, which not only decreases your take-home pay but also taxes your money twice. Borrowing money from your 401k is also taking money away from your future to pay off past debts or to support your current lifestyle. Taking a look at your entire financial picture, including your spending habits will help you determine if a 401k loan is right for you. Lastly, the money that you borrow from your 401k will not be able to benefit from capital appreciation or dividends. This potential loss in investment gains could be devastating in the long run, so you should make sure that all of these factors are discussed when determining “is a 401k loan is right for me?”.
Should I Take A 401k Loan or Hardship Withdrawal
In summary, if your planning on using a 401k loan to consolidate debt or pay off high-interest debt then 401k loans can be a great alternative to traditional financing. Just make sure you ready your 401k plan documents thoroughly and have a plan for exactly what you’re going to do with your 401k loan proceeds.