401k plans can allow you to save up some money for your future and get a tax break while doing it. However before you go out there and start to contribute you should know the 401k retirement plan facts this way you know your options.
Let’s start with the basics, what is it? Basically whenever you invest into a 401k plan you are depositing before tax dollars into the account and are able to invest it without paying taxes on the interest until you make a withdraw.
There is a maximum amount that you can deposit into your account every year, for 2010 this amount is $16,500 if you are under the age of 50 or $22,000 if you are over the age of 50.
So, what happens if you want to get money out? You can make a withdrawal from your 401k at any time; but you do need to pay taxes on the money at that point. In addition to that you will also have to pay an early withdrawal penalty of 10% if you are under the age of 59 ½.
If you are unable or unwilling to do that another option is to get out a 401k loan. A loan from your 401k allows you to take out a low interest loan on your account. This allows you to borrow money without paying taxes and without harming your account that badly.
Normally if you are going to be able to pay it back it can actually be a much better option then taking out a regular withdraw. However if you are going to have the loan out for a long time it can actually be a worse option. This is because most plans with prevent you from depositing more money into the plan if you have a loan out.
So if you take out a $5,000 401k loan and it takes you 1 year to repay it that means you missed out on depositing up $16,500 into the plan. All this to save you from making a $5,000 withdraw. This is why it is important to consider all facts before making your final decision.
