A 401(k) plan is a powerful tool for retirement savings, offering tax advantages and employer contributions. However, life’s financial demands may tempt you to consider withdrawing money out of your 401(k) accounts. Some plans may allow you to take a hardship distribution due to an immediate and heavy financial need to pay for your or your spouse’s, your dependents’ medical expenses, funeral expenses, or tuition and educational expenses. Please note, according to the IRS, you are limited to a hardship distribution in the amount of funds necessary to satisfy that financial need. Be aware that a hardship distribution is subject to income taxes (unless they consist of Roth IRA contributions). You may be subject to a 10% additional tax on early distributions if you do so before you turn 59½ years old.
Another way to tap into your 401(k) is with a loan on your funds. Each employer’s plan is different, but you may be able to take out up to 50% of your vested account balance. You will have to pay that borrowed money back, plus interest within 5 years of taking your loan, but please check your 401(k) administrator for complete rules.
Taking money out of your 401(k) may offer financial relief, but weighing the pros and cons carefully before doing so is essential. Visit IRS.gov to review important regulations, talk with your tax professional, and speak to your plan’s administrator to fully understand the plan’s rules, fees, and any penalties. Here are a few more pros and cons to consider:
Pros:
1. Access to immediate funds: One of the most significant advantages of withdrawing from your 401(k) is immediate access to funds. Whether you face an emergency, need to consolidate debt, or are considering a large purchase, the ability to tap into your retirement savings can provide necessary liquidity.
2. No need for additional debt: Taking a 401(k) loan can be an alternative to high-interest loans or credit cards. If used wisely, this can help you avoid incurring additional debt. Unlike traditional loans, as noted above, 401(k) loans are repaid to your account, with interest, potentially mitigating the financial strain compared to borrowing from a bank.
3. Potential for lower interest rates: 401(k) loans typically come with lower interest rates than other borrowing options. This is because the loan is effectively “self-financed,” as you’re borrowing from your savings. However, the interest you pay goes back into your 401(k), not to a lender.
4. You don’t have to pay the money back: If it is a hardship distribution, not a loan, you are not required to pay the money back to your 401(k) account. However, it is considered taxable income.
5. Help you get into a home: You can borrow funds from your 401(k) to help make the down payment on a home. Please note that there may be penalties and tax implications based on your circumstances, but the funds could be the financial bump you need to make the big move into home ownership.
Cons:
1. Penalties and taxes: As we’ve noted, withdrawing money from your 401(k) before age 59½ can lead to substantial penalties. Generally, you’ll face a 10% early withdrawal penalty in addition to ordinary income tax on the withdrawn amount. This can significantly reduce the amount you receive.
2. Impacts your retirement savings: Removing funds from your 401(k) can undermine your long-term retirement goals. The money you withdraw is no longer invested in the financial market, which means you could miss growth opportunities. This could result in a less comfortable retirement, as compounding interest and investment returns are critical for building a substantial retirement nest egg.
3. Loan repayment risks: If you leave your job or are terminated, your 401(k) loan may need to be repaid in full within a short period, often 60 days. Failure to repay the loan could result in it being treated as a distribution, triggering taxes and penalties. Your 401(k) administrator can provide you with more details.
4. Reduced contributions: Taking out a loan or withdrawal from your 401(k) can impact your ability to make contributions. With less money in your account, you might find maintaining your regular contribution levels challenging, potentially affecting your long-term savings strategy.
5. Loss of employer match: If you have a 401(k) loan, some plans might restrict your ability to contribute to your account while repaying the loan. This could mean missing out on employer matching contributions, which are essentially free money and an important part of your retirement savings growth.
You do have other options.
For some, taking a 401(k) distribution or loan may be the way to go. However, there are other, simpler options. Consider our Signature Loan. You can use the funds to pay for whatever you need, from making a major purchase to consolidating debt to educational costs, it’s up to you. You’ll have up to 60 months to pay off the loan and you can borrow up to $40,000 at a variable rate as low as 9.24% APR* for a limited time.
Rather than being reactive, consider being proactive by establishing a line of credit. Having an established line of credit ensures you can access funds whenever you need them most. Our Signature Line of Credit gives you peace of mind. This variable rate loan starts as low as 10.49% APR**.
A credit card is the most common go-to for paying for a financial hit. The advantage is you probably have one in your wallet, it’s easy to use, and you don’t have to do any paperwork to access the funds. However, the average national interest on credit cards is currently about 24.92%.† Our Select Visa® starts at 8.99% APR‡. And now, you can get a 0% intro APR for the first 6 months if you qualify§. Whatever card you use, it’s important to pay off the balance as quickly as possible to limit how much interest you’ll pay.
Final thoughts.
Making a hardship distribution or taking a loan from your 401(k) can offer short-term financial relief, but it carries significant drawbacks that can impact your future retirement security. Weighing the immediate benefits against the potential long-term consequences is crucial. Before deciding, exploring other financial options, such as a personal loan or line of credit, is wise. Whatever path you follow, please consult a financial and tax advisor, and the plan’s administrator, before making a move that will affect your retirement goals.
*, **APR = Annual Percentage Rate. APR is the annual rate of interest that is paid on an investment, without taking into account the compounding interest within that year. Rates are subject to change at any time. 2.00% rate discount is for a minimum of $1,000 monthly ACH Direct Deposit into a Farmers Insurance Federal Credit Union Checking Account and Automatic Payment/Folio Deduction as a repayment method to qualify. Rates are subject to change at any time.
SEPTEMBER 2024 DIRECT DEPOSIT / 2% LOAN DISCOUNT PROMOTION: Up to 2.00% APR (Annual Percentage Rate) discount on qualifying loan is for a current or newly established minimum of $1,000 monthly Direct Deposit into a Farmers Insurance Federal Credit Union Checking Account and Automatic Payment Deduction as a repayment method to qualify. Offer subject to change or cancellation at any time. Direct Deposit loan rate discount available if at a time prior to loan funding (a) Member has a current or newly established recurring monthly Direct Deposit of at least $1,000 from net pay, pension, or government benefits, and (b) Member is obtaining a FIGFCU loan. Maximum available loan rate discount of 2.00% if Member is eligible to combine Direct Deposit discount with other available discount a maximum of 2.00% shall be applied. If Direct Deposit stops before loan is paid off, loan interest rate will increase by 2.00%. Other restrictions may apply. All loans are subject to credit approval. Rate and terms are subject to change without notice.
Promotion Offering applies only to Consumer accounts, which must be in good standing. Guardian, rep payee or executor, collections charge-off, business, and/or organizational accounts are ineligible. Must be 18 years of age or older. FIGFCU reserves the right to end or modify this promotion without notice. Member cannot take advantage of this promotion more than once. Promotion cannot be combined with any other account promotion for a discount over 2.00%. Visit figfcu.org for account details, minimums, and fees. Federally insured by NCUA. Subject to employer and/or payer terms and conditions. FIGFCU will generally post payroll Direct Deposits on the day they are received, other exceptions may apply. Promo Period: September 3, 2024 to October 11, 2024. Signature Loans, Business Signature Loans and Agency Acquisition Loans not eligible for refinancing.
Available to new and existing Members who apply for eligible loans during the promotional period. Direct Deposit/Folio Direct Deposit into a FIGFCU Checking account (either High Yield or CashBack) in the amount of $1,000.00 or more monthly and Automatic Payment/Folio Deduction to the loan is required. Loan and checking accounts with Direct Deposit must be under Primary Membership. Checking/Direct Deposit can NOT be to a joint Checking account under a different membership. Signature Loans, Business Signature Loans and Agency Acquisition Loans not eligible for refinancing. Refinance Fees are as follows: Vehicle Loans – $200 refinance fee unless $4,000 in new money is added to the loan. Agency/Business Secured Loans – $400 refinance fee unless $10,000 in new money is added to the loan. Home Equity Loans/HELOC’s – $500 refinance fee for loans booked within the last 12 months unless $20,000 new money is added to the loan. Interest rate shown on final loan disclosures will be the higher rate prior to the discount. Loan will be booked with the lower discounted rate. Direct Deposit Addendum will be signed with closing loan disclosures.
†Schulz, Matt, “Average Credit card interest rate in America today,” Lendingtree.com. 9 August 2024. Accessed 10 September 2024.
‡$100 Bonus for New Credit Cards for: Crystal Visa, Select Visa & Visa Platinum: A $100 (one hundred dollars) bonus will be paid in the form of “Visa Statement Credit” when at least $5,000.00 (five thousand dollars) is spent in purchases within the first 3 months (qualifying period) of the “New” Visa card opening. Bonuses will be paid out within 90 days after the qualification period. Example: If a card is activated on January 1, 2021 and the total of qualifying purchases for the months of January, February and March is at least $5,000, the primary borrower will receive a Bonus of $100 (one hundred dollars) no later than July 1, 2021. Limit of one reward/bonus per member number. Qualifying transactions must “post” to the designated account during the qualified period. All qualifying purchases will count towards the $5,000 in spent purchases unless return for credit of any of the qualifying transactions takes place within 90 days of the end of the qualifying period. Transactions may take two business days from the date of purchase to post. Member must be in good standing to be eligible for bonus. New accounts are subject to FIGFCU approval and all other terms and conditions apply. This offer is valid only for individual account /card holders, is non-transferable and cannot be combined with any other offer. The $100 Bonus is a product promotion sponsored by FIGFCU and may be discontinued at any time. Visa is a registered trademark.
APR = annual percentage rate. Rates are subject to change at any time.
The balance transfer amount from other Farmers Insurance Federal Credit Union credit cards will retain its current rate (i.e., Select Visa at 8.99% – 18.00%, Visa Platinum at 10.99% – 18.00%, until the transferred balance is paid off. APR=Annual Percentage Rate. Rate quoted is the lowest rate possible for qualified borrowers and is subject to change. Qualification is based on credit history, debt, and the ability to repay. Your rate may vary. All loans subject to credit approval. The newly opened Credit Union credit card’s rate will only apply to new transactions. Any balances on the previous Credit Union credit card must be paid off at the prior credit card’s rate.
§Zero Percent (0%) Introductory Rate Promotion for purchases, is offered for new FIGFCU Select Visa® Credit Card account holders. This incentive offer, is not available to those members who are opening a new Select Visa and had an outstanding balance or a closed FIGFCU Zero Percent Loan account and/or had any FIGFCU Select Visa® Credit Card within the last year. If you are in an introductory rate promotion period, you are not eligible to transfer other loan balances, line of credit balances, credit card account balances or CASH Advance to take advantage of the introductory rate promotion.
The program promotion may be modified, suspended or cancelled or may be changed at any time without notice and without restriction or penalty. Farmers Insurance Federal Credit Union reserves the right to change the promotion rates and program retention period from time to time. You will be notified of any expiration or program changes as required by law. Contact Farmers Insurance Federal Credit Union for details on applicable conversion to current rate and payment options which are then in effect. At Farmers Insurance Federal Credit Union’s sole discretion, the program offering of the program may be terminated, for any reason, including but not limited to a “Rules Violations”, your Farmers Insurance Federal Credit Union account is not in good standing or is suspected of fraud, or if you move to another Farmers Insurance Federal Credit Union credit card.
This program is void where prohibited or restricted by law. You are responsible for any federal, state, or local taxes.
Effective Offering Dates: Promotion period for Zero Percent (0%) introductory is effective for FIGFCU Select Visa® Credit Cards opened beginning July 20, 2020 through “until further notice”.
Loss of Introductory APR: We may end your introductory APR and/or apply the Penalty APR if you make a late payment or are Over limit.
Billing Rights: Information on your rights to dispute transactions and how to exercise those rights is provided in the Billing Rights section of the Visa® Credit Card Agreement.
Introductory rate and incentive offers for Select Visa®, are not available to those members who had an outstanding balance on a preexisting or closed FIGFCU Visa Credit Card account and/or had an FIGFCU Visa Credit Card within the last 12 (twelve) months. If you are in an introductory rate promotion, you are not eligible to increase limits until the introductory rate promotion has expired.
TERMS AND CONDITIONS The introductory Annual Percentage Rate (APR) Zero Percent (0%) will apply to purchases made during a promotional period of 6 (six) months from the date of opening of your Visa account. After this promotional period ends, 6 (six) months from the date of activation of your Visa account, your standard APR will apply to any remaining balance and to all new purchases and balance transfers. The terms of this introductory rate may not be applied to existing Farmers Insurance Federal Credit Union Visa accounts.
This promotional introductory offer is based on meeting Farmers Insurance Federal Credit Union’s criteria for creditworthiness. Farmers Insurance Federal Credit Union will review your credit and employment history and any other information permitted by law to process your application. The credit line on this account will be determined after a credit review of your application by Farmers Insurance Federal Credit Union and will be based on various factors, including income. FIGFCU maintains the right to not open this account if: a) the information provided is incomplete, inaccurate or cannot be verified, or if you do not meet Farmers Insurance Federal Credit Union’s standards for creditworthiness; b) your name and/or mailing address on the credit application have been altered; c) the income you reported on the application is insufficient to support the opening of this account; or d) you do not meet Farmers Insurance Federal Credit Union’s membership eligibility or “member in good standing” requirements. You have the right to review your credit history by contacting the appropriate credit reporting agencies.
Change in APRs, Fees and Other Terms: Farmers Insurance Federal Credit Union may change the APRs, fees and other terms of your account at any time in accordance with applicable law and the Visa Credit Card Agreement. Factors we may consider in determining whether and how to change your terms include, but are not limited to, a late payment or an extension of credit that exceeds the credit limit, the frequency and severity of defaults and other indications of risk on accounts with Farmers Insurance Federal Credit Union and other creditors. To the extent allowed by law, the change in terms will affect all outstanding balances. If we increase your APRs, the new APRs will apply only to new transactions you make after we notify you of the change in writing unless it is for default in terms as outlined above.
