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June 29, 2017

401(k) Loan Rules: How Does Borrowing From 401(k) Plans Work?

Although the aim of 401(k) plans is to build income for retirement, some people find another use for their savings by taking out loans against them. If a plan allows borrowing, this may seem a relatively easy way to access a quick loan during your working life. What are the 401(k) loan rules and how does borrowing from a plan work?

401(k) Loan Rules, Tax and Borrowing Limits

A loan from a 401(k) plan is not subject to tax if it meets criteria set by the IRS. You can borrow up to 50% of the vested balance up to a maximum limit of $50,000. Borrowing must be paid off within 5 years, although this period may be extended if the money is used to buy a main residence for the first time. Repayments have to be made at least once a quarter and must be made in more or less level amounts.

Do All 401(k) Plans Allow Loans?

Although all 401(k) plans can allow loans, not all of them do. The rules set on borrowing may also vary from plan to plan which could see additional criteria added to standard IRS guidelines. So, for example, one employer may offer loans for any purpose; another may rule that loans can only be used for specific purposes (i.e. for medical costs, college expenses or to buy a first home). Those considering 401(k) loans should, therefore, check if they are offered by plans and if there are any additional specifications to consider.

How Does Borrowing From a 401(k) Plan Work?

Each plan will outline the application process for a loan. This may involve completing a form or applying by phone. It does not involve a credit check. Loans from 401(k)s must be repaid with interest as outlined by the plan. Repayments can be deducted from pay checks or paid from bank accounts but will not be made with pre-tax dollars as with plan contributions. If you don’t pay off your borrowing to schedule, then the borrowing may be viewed as an early withdrawal, at which point you may be liable to income tax and a 10% penalty. If you change job or are laid off, the loan may become due more quickly.

Are 401(k) Loans a Good Idea?

There are advantages and disadvantages to borrowing against a 401(k) plan and it may be wise to think hard about the pros and cons before applying for a loan. Although this can seem to be an easy and cost-effective way to borrow, it may have an impact on retirement income in the future. In some cases, if loans are not an option, then a hardship withdrawal may also be worth considering.

Introduction to Small Business Loans

Do You Need Cash for Your Business?

One of the most difficult things about starting a small business is finding enough money to get your business up and going on the right foot. Utilizing a small business loan can be a good way to have enough capital to start your business out right. Applying for small business loans can be a bit complicated and intimidating. However, with some good preparation you can get the right loan for your business.

The first step in starting any small business is to write a business plan. You will need your business plan to attain a small business loan. Don’t even attempt to apply for funding of any sort without having completed your business plan. It is simply a waste of your time. You also want to make sure that if you are going to write a business plan that you do a good job of it and make it as professional as possible. There are many articles online and books available at your local library to help you with writing it.

The main requirements for getting small business loans are; personal credit rating, your business plan, your experience in your business, your education and if you are a start-up or existing company. Small business loans come in many forms. They can be signature loans, no document loans, collateral loans and no-collateral loans. Which is right for you is determined by a number of factors including the length of time you need the loan for and your personal credit history. The better your credit history, then the better the loan options you have. With a small business, you are your business; therefore your credit effects your funding options.

When applying for a small business loan you will want to consider how much money you will need to start your business, or how much capital you need for your existing business. You will have to show the lender, in writing, exactly how you plan on spending the money you are borrowing. The lender will want a detailed break-down of your expenses dollar by dollar.

When applying for your small business loan you will have to show the lender that your business is strong enough to last long enough for you to repay your loan. You will need to have a written cash-flow projection to show how you will repay your loan and how the loan will help your business to succeed.

Going into the process of shopping for a small business loan it is important to understand that lenders want to give you a loan. However, they need to be shown that you know your business, that your business is sound, and that you will be around to pay off the loan when the time comes. You can show this to lenders through a strong business plan which should include all of the information in this article if you are looking for funding for your business.

Just as with personal loans, you may not receive the first small business loan you apply for. Do not let this stop you. Move on and look for another lender or choose a different loan type. Listen to the reasons you did not receive the first loan you applied for and see if you can improve upon the issue for your next try. Best of luck to you and your business!