401k loan is an alternative to getting money from 401k, but basically, it’s not an offer that you can get from every company. Before seeking a 401k loan, the best thing is to first ensure that the plan administrator or your employer offers this option. Here are the highlights of how to get your 401k money that you should note:

• Loan payments are usually made after-tax dollars
• The payment plan for loans is within five years, and interests are included in these payment plans
• Rather than your account being directly deducted, you’ll make payments for the loan through your paycheck deductions
• Your vested account balance is what will determine the amount that you will be able to take as a loan. In most cases, it is usually 50% of the balance that you have, and this is especially for loans that is up to $50,000.

Substantially Equal Periodic Payments (SEPP)

The last method that covers for getting money from the 401k is known as the Substantially Equal Periodic Payments (SEPP) method. With this option, you can access the funds, and you also won’t need to pay the 10% penalty that comes with the 401k withdrawal. Like the 401k loan, it is also an alternative with which you can avoid the 10% penalty.

Another thing that you should note is that the payments are also not under the employer-sponsored retirement plan, but they are grouped as the Individual Retirement Account (IRA). Also, the payments are not a lump sum, unlike the 401k withdrawal option. If you start SEPP payment, you are required to continue for another five years or until you are 59.5, depending on which is a longer option.

This implies that if you start SEPP when you are 58, you will be required to keep going until you are 63. There are different methods that are used in calculating the payment amount, and they include Required Minimum Distribution, Fixed Annuitization, and Fixed Amortization. Basically, each of these methods differs in their amounts.

Pros and Cons of 401k Loans

Pros

The main advantage of the 401k loan is that you won’t be diminishing any of your assets, but you will only be borrowing from them. Also, you won’t need to pay any tax on the amount that you borrow. This is in addition to the interest that goes to your retirement account. Also, it’s worth noting that this will not in any way affect your credit score, and this is because 401k loans don’t get reported to the credit bureau.

Cons

In a case where you leave your job, you’ll need to pay the full balance of the loan. These balances could also be counted as an early distribution, especially if it is not repaid, and its also subject to the 10% penalty. In this instance, you’ll need to forfeit the option to invest the money and place more focus on the 401k loan during the specified timeframe.

Pros and Cons of 401k Withdrawals

Pros

With the 401k withdrawals, the money is yours, and you won’t need to take a loan. Also, you won’t be expected to pay anything, and this reduces your monthly cash flow. The alternatives to this are the Lump Sum or SEPP.

Cons

You will end up taking the money for your retirement, and there could be a 10% penalty attached to it. Also, you’re likely to lose compound interest during the process. Basically, a 10% gain on $50,000 is a lot better than a 10% gain on %15,000. For someone that is still working, you can utilize an early distribution to bump up to a higher tax bracket, which is desirable.