do you pay interest when you take a loan out of 401k?

Answer 1

In general you have to pay interest on any loans taken against your 401(k). The good thing is the interest is paid into your account, so it's almost as though you're paying yourself the interest. Sounds pretty good in principle, but the problem is you're paying the interest back with after-tax money, and then when you take the money out during retirement, you pay tax on it again.

For example, you take out a loan of $5000 from your 401(k). You pay it back with 8% interest within the time limit (usually five years or so).
8% of $5000 is $400, over 5 years is about $2000 total.
Let's say you get taxed at 20%. That means it took you $2500 in gross pay, which nets out to $2000 once you take out the tax hit.
On that $2000 you pay in interest, you will pay tax on when you retire ($400 if the tax rate is still 20%).
In essence, you're paying $900 in taxes ($500 the first time, $400 when you retire).

This page doesn't say anything about loans, but there's some good general 401(k) information.
http://www.plannerconnect.com/retirement-planning-401k-401k-distributions.html

Answer 2

Yes. When your company sets up the plan, they will have the option to allow loans or not. Most do, with limits at no more than 50% of your balance at the time of the loan, and a $50,000 top limit. The payback time is usually also restricted to 5 years, unless it's for purchase of a residence. The interest rate is also decided by your company when the plan is set up; a common rate is whatever the prime rate is plus 1%. And yes, essentially you are paying that interest back into your account.

That said, you should not borrow against your 401(k) plan. It's for retirement, not an emergency ATM. I run our plan at work, and unless it's towards a down payment on a house, I would discourage employees from thinking about their retirement funds in a short term manner. Look at all other sources before borrowing against long term savings.

Answer 3

Your 401k isn't dropping interest maximum in all probability, yet primary. Your plan has some benefit, yet, as long because of the fact the own loan is amazing, your 401k isn't growning--no assure that it would be. Shorter particularly than long term payback is superb theory, shorter the extra advantageous. that is extra advantageous which you're taking a private loan particularly than a withdrawal from retirement, however the suitable is to no longer do the two. ought to you particularly of doing this, pay in the direction of your 10% pupil own loan the quantity you often make contributions to the 401k? purely no longer make contributions to the 401k, particularly than taking own loan, and making double/triple money on pupil loans? bear in strategies you're dropping no longer purely your contribution to the 401k, yet in addition in spite of matching money your corporation places in. Plus you're increasing your taxable earnings by ability of no longer contributing, and would have some tax result.

Answer 4

Yes. The interest is paid to your 401k. However, be advised that since you have already paid income tax on the interest that you pay yourself, it will be taxed twice, because it will be taxed again when you start taking withdrawals from your 401k.

Answer 5

Yes and no. There is an interest rate on the loan. It will be around half of what you lose by not leaving the money in the 401(k).

Answer 6

Yes, however usually the money comes out of your own account. So the interest paid, gets paid back into your account. You're not really loosing any money, you're just paying yourself.

Answer 7

you can not take a loan out of your 401k!!!

Answer 8

No you may pay a penalty, depends on Polices and Procedures

Answer 9

Yes.

To yourself.

But it's a very dumb idea.