What is a Retirement Plan Loan?

A retirement plan loan is a loan that enables a person to borrow against a 401k or other tax-deferred investment. In most cases, the retirement plan loan originates with the financial institution that oversees 401k accounts on behalf of a person’s employer. This type of loan can have its advantages and disadvantages.

The Pros Of A Retirement Plan Loan

Borrowing against a tax-deferred investment can have its distinct advantages. They include:

  • Easy approval process – Since the loan is guaranteed by the the 401k proceeds, this type of loan is easily approved by lenders. When the loan begins, investment portions in the 401k account are sold off to cover the proceeds.
  • Easy repayment terms – A retirement plan loan is generally very easy to pay back. The interest rates attached are low and repayment will generally involve direct deductions from an employee’s paycheck or bank account.

  • Speed – A retirement plan loan can close in approximately 10-20 days. 

The Disadvantages Of A Retirement Plan Loan

Taking out a loan against tax-deferred investments set aside for retirement can reduce the value of 401k.  Additionally,  the earned income potential of the retirement account will be diminished as a result of the reduced capital.  in the account. Lastly, It is also possible that a tax penalty will be assessed if the employee leaves a position before a loan is fully repaid.

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