Planning for retirement is an essential part of everyone’s financial strategy. Far too many people today are nearing retirement without enough money saved up to do so. The good news is that there are a variety of investment vehicles that can help with the saving process. A 401(k) is a great investing option because contributions are pre-tax. This results in huge tax savings over a person’s career. However, there are annual contribution limits to this investment account. Contribution limits serve several purposes. If someone needs money from the 401(k) before retirement, a 401(k) loan is the way to go.
Building your 401(k) Balance
Investing over the long term is the best way to build wealth. Some investors try to trade stocks as a way to make a quick return. However, there are a variety of studies that show long term investing is the most proven way to build wealth. Instead of trying to time the market, invest a certain percentage of income into your retirement accounts each month. A lot of employers will match the contributions up to a certain percentage. This means that you could essentially earn free money on the funds that you invest. There are also some positive tax benefits from investing in retirement accounts. Contribution limits on a 401(k) prevent a person from reducing their taxable income to zero. Reducing your adjusted gross income can result in a tax refund at the end of the year. If you have questions about the retirement saving options at your work, ask your employer for guidance in this process.
What is a 401(k) loan?
There are times in life when a person may need to take advantage of the money saved in their retirement accounts. The issue is that there is an early withdrawal penalty if you take the money out too early. Taking out a 401(k) loan is the best option for a lot of reasons. Interest rates are low right now, and borrowers will not have to pay a lot back in interest. In addition, there is already a balance in the 401(k) account in case of an emergency. If you need to know how to get a 401k loan, there are several ways to accomplish this. Working with your place of employment is a great start to figuring out the process.
Paying Back the Loan
Whenever money is borrowed, the borrower must eventually pay back the loan. There are many people who wrongly assume that a 401(k) loan is not real debt. However, this debt can hurt your credit score just like any other missed payment. If you do decide to borrow money against your 401(k), it needs to be a priority to be paid back. In the last housing crash, a lot of people borrowed money against their retirement accounts to purchase a home. This ended up being a huge mistake when the housing values across the country crashed. Before withdrawing the money, it is always a good idea to have a payback plan.