A 401(k) Loan with a Current Employer
I talk a lot about the Solo 401(k) and how powerful it is. One of my favorite components of the Solo 401(k) is it allows you to yank money out of the account without paying the penalties and taxes. This allows you to have more control of your money. Maybe you want to use some of that money to pay off some debt or fund a business? I talked to some people and they say, "Well, Daniel, what you're talking about, I'm pretty sure I can do through my 401(k) through my job."
Well, sometimes you can't. Sometimes you can. If you can, I'm here to tell you there comes restrictions in being able to do that. Let me explain...
So let's just say you've got a 401(k) through your current employer. Attached to that 401(k) is going to have what are called "plan docs."
All 401(k)s have plan docs. You need to find out the following in these plan docs: is there a loan feature in the plan docs? If there is, then there comes restrictions with that.
Number one. Let's just say you took out $10,000 from your 401(k) through your current plan. It's going to be a loan. Your employer is going to expect you to pay back that $10,000 within five years to avoid the tax hit. Now, they're going to deduct money from your paycheck every week or every other week (however you get paid).
And, you're not going to have any say in this. You're going to get your pay stub one day and you're going to say, "Man, I was used to getting X, and now I'm getting Y." You're making less money because the loan has to get paid back. So, they're deducting money from your paycheck and you have literally no say.
Number two. If you ever leave that job, your employer, more than likely, is going to require that you pay back the balance on that loan.
So if you took out $10,000 and you still owe some of the money there, you're going to have to pay back that loan in a really quick time frame to avoid the taxable hit. So there's a lot of restrictions if you are able to take money out of your 401(k) as a loan.
That's why I love the Solo 401(k) because if you're a business owner, or you're looking to start a business, and you need to take money out of your retirement account, a Solo 401(k) is a great way to do that because you don't have these restrictions.
So, it's really important that you understand the difference between a 401(k) through your current job and a Solo 401(k) with you being the business owner.