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In a financial pinch? Lend yourself 401(k) money … carefully

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in Small Business Tax

Do you need cash in a hurry to help pay for a child’s college, a medical emergency or some unforeseen circumstance?

Strategy: Borrow the money from your 401(k) plan if your employer allows it. A 401(k) loan is just what it sounds like—a legal obligation where you borrow money and agree to pay it back.

Make no mistake about it: You’re required to repay the borrowed amount, with interest, to your account. However, you’re effectively paying yourself back. In the meantime, you have use of the funds (although your earnings within the account may be diminished).

Unlike a hardship distribution from a qualified retirement plan, a 401(k) loan is exempt from federal income tax plus the usual 10% penalty tax for withdrawals made prior to age 59½ (see box below). Yet there’s a catch. The amount you borrow can’t exceed the lesser of:

  1. $50,000 or
  2. The greater of $10,000 or 50% of your vested benefits in the plan.

Example: Let’s say you ha...(register to read more)

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