401(k) Loans Pros and Cons – Bank On Yourself

A recent article in the Wall Street Journal says it’s time to consider borrowing money from your 401(k). These loans have become more popular as more Americans get deeper into debt at high interest rates.

Most 401(k) plans offer participants the option to borrow from their plan. No credit check or collateral is required.

The IRS requires a mandatory repayment schedule of principal plus interest, currently 9.5% in many plans. That interest rate is lower than personal loans and significantly lower than the average credit card interest rate, making it appealing in today’s climate.

The article went on to explain the significant downsides of these loans. That got me thinking about how a 401(k) loan differs from a loan from your Bank On Yourself plan. So, let’s compare…

Recall that the Bank On Yourself strategy relies on a high-cash-value, low-commission, dividend-paying whole life policy. It’s guaranteed to grow by a larger dollar amount every year, regardless of what’s happening in the market or the economy.

How Much Can You Borrow and What Hoops Do You Have to Jump Through?

The IRS only allows you to borrow 50% of your 401(k) value up to a maximum of $50,000. However, you can typically borrow up to 90% of a Bank On Yourself-type policy’s equity or cash value.

That’s how, during the depths of the financial crisis, when banks weren’t lending, and credit lines were being shut without warning, my husband and I got $500,000 from our family’s policies to grow the Bank On Yourself company.

We only had to answer two questions: “How much do you want?” and “Where do you want it sent?” The money was in our checking account in less than a week.

In some companies, taking a 401(k) loan involves a 13-step approval process… just to use your own money!

[Watch Me Duke it Out in an Imaginary 6-Round Championship Fight: 401(k) Vs. Bank On Yourself Loans]

What’s the Loan Interest Rate?

The companies used by the Bank On Yourself Professionals charge below-market, simple interest, currently around 5.5%. And, like the interest you pay on a 401(k) loan, the interest you pay benefits you, as we explain in our Consumer Guide to Bank On Yourself Policy Loans.

However, unlike taking a 401(k) loan, your Bank On Yourself policy will continue growing as though you never touched a dime of it! And you don’t have to liquidate any assets to get money.

These are just a few of the reasons why so many Bank On Yourself policy owners say their only regret is that they didn’t start their plan sooner. It’s also the best sleep-through-the-night savings strategy, providing guarantees, predictability, control, and numerous tax advantages.

To find out what your bottom-line guaranteed numbers and results could be if you added Bank On Yourself to your financial plan, request your free, no-obligation Analysis and Recommendations here now.

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Are There Restrictions on Repaying Loans?

Unlike mandatory 401(k) loan repayment schedules, you set your own repayment schedule with a Bank On Yourself loan.

Some 401(k) plans don’t allow you to make contributions while paying back a loan; some have a set time to wait before contributing again. If your employer matches your contributions, you’ll take a double hit.

These are just a few of the hoops you have to jump through for a 401(k) loan.

Taxation of Interest Payments:

You’re taxed twice on the interest payments you make on a 401(k) loan. That double taxation reduces the benefit of paying yourself interest on a 401(k) loan from 9.5% to an after-tax 6.65% for those in the 30% tax bracket. There is no such consequence for Bank On Yourself loans.

Are There Loan Fees?

The typical 401(k) administrator charges a $75 loan origination fee plus an annual loan maintenance fee of $25. That raises your effective borrowing cost.

There are no fees to borrow from your Bank On Yourself policy.

What Happens if You Can’t Pay Back a Loan?

About 8% of actively employed workers default on 401(k) loans, which jumps to 65% of people who leave their jobs. Most 401(k) plans require a borrower who leaves a job with a loan outstanding to pay the remaining balance, often in 30 to 90 days, or face default.

If you default, you must pay income tax on the remaining balance, plus a 10% penalty if you’re under age 59 ½!

Taking a Bank On Yourself policy loan is blissfully free of these pitfalls.

As I’ve pointed out in my books and on the Bank On Yourself website, even though you’re not required to, you should pay back the loans you take to make major purchases on the schedule you set. That replenishes your cash value so you can use it in retirement to take tax-free income.

If you borrow and never repay your loans, or you don’t at least pay the loan interest due, your policy could lapse if you have no cash value left to cover the loan interest. That could result in an income tax liability on any gain.

You don’t typically pay back loans used to provide income in retirement. Instead, they are deducted from the death benefit upon the insured’s death.

How to Add Guarantees, Control, Predictability, and BIG Tax Savings to Your Financial Plan…

To find out how you could enjoy liquidity, control, guaranteed growth, and peace of mind by adding the Bank On Yourself strategy to your financial plan, request your free, no-obligation Analysis right here.

You’ll get a referral to a Bank On Yourself Professional who has passed a rigorous training program and who can answer your questions about this concept and show you how you could benefit from a custom-tailored program: