Today we’re focused on comparing a 401k loan to an early withdrawal from a Traditional IRA. We will include the new CARES ACT rules. If you are currently struggling financially and have to make a decision between the two then here are some things to consider. Remember a 401k loan is a loan from yourself to yourself and no one else. An early withdrawal from a Traditional IRA is treated differently now thanks to the CARES ACT which was introduced due to the virus.
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When it comes to planning for retirement, there are many different options available to individuals. Two of the most common vehicles for saving are 401k plans and Individual Retirement Accounts (IRAs). While both of these options can be effective ways to build a nest egg for retirement, there are some important differences when it comes to accessing the funds.
One of the main differences between a 401k plan and an IRA is that a 401k may allow for loans, while an IRA generally does not. This means that if you have a 401k plan and find yourself in need of cash, you may be able to take out a loan against your retirement savings. In contrast, if you have an IRA, you will likely need to withdraw the funds entirely in order to access the money.
There are pros and cons to both options. On the one hand, a 401k loan can be a convenient way to access funds quickly without having to pay taxes or penalties. Additionally, you’ll be paying interest on the loan, but the interest payments will be going back into your retirement account, so you’re essentially borrowing from yourself. This can be a good option if you need the money for a short-term emergency or unexpected expense, such as a medical bill or home repair.
However, there are some downsides to taking out a 401k loan. First, not all employers offer this option, so you may not be able to access this feature if you work for a company that doesn’t allow it. Additionally, taking out a 401k loan means that you’ll be reducing the balance of your retirement savings, which can have long-term implications. If you’re not able to repay the loan on time, or if you lose your job before the loan is fully repaid, you may face taxes and penalties for early withdrawal.
In contrast, an IRA withdrawal can be a more straightforward option for accessing funds. When you withdraw money from an IRA, you’ll generally have to pay taxes on the amount you withdraw, but there may not be any penalties if you’re over age 59.5. Additionally, you can withdraw as much or as little money as you need, without worrying about the restrictions of a 401k loan.
However, taking an IRA withdrawal also comes with its own set of risks. If you withdraw funds before you reach the age of 59.5, you may face early withdrawal penalties or other fees. Additionally, if you withdraw a large amount from your IRA, you may be putting your long-term retirement savings goals at risk. Because an IRA is meant to provide for a lifetime of retirement income, it’s important to balance the need for short-term cash with your long-term retirement goals.
Ultimately, whether a 401k loan or an IRA withdrawal is better for you will depend on your individual circumstances and financial goals. If you need cash quickly and have a 401k plan, a loan may be a good option, but be sure to consider the long-term implications. If you don’t have access to a 401k loan or prefer not to use this option, an IRA withdrawal may be a better choice, but make sure to consult with a financial advisor to fully understand the tax implications. By weighing your options carefully and asking for expert advice, you can make an informed decision that will help you meet your financial needs both today and in the years to come.
If you only knew how relevant this video was. Great timing thank you.
do the double tax 401k video; people are pin heads and keep repeating that. thanks
I took out the remaining $17,000 from my IRA. I Backdoored $14,000 into Roth (19 and 2020) and put the rest into my taxable brokerage account. I’ll pay the taxes over the next three years.
What about SIMPLE IRA?
Also keep in mind the CARES ACT means nothing unless your company plan chooses to adopt it. Evidently its optional for them, which pretty much defeats the purpose for the people.
Hey Dustin. What if you want to pull out $9000.00 out of the 401K for self direct invest in great stocks like Facebook, Google, MSFT & Apple? I want to buy & hold these stocks if they're low enough. Any thoughts?
Dustin, thanks so much for this video.
Thanks Dustin great info if it gets to that point.
I don't think you mentioned the CARES ACT rules for 401k's have a COVID19 direct impact qualification.
great vid. do a video if taking a loan out on the 401k regarding being double taxed. I worked for a 401k loan company a while back and 1 of the reasons the loan was not a good idea was because of that "double tax". How i was explained to us was like this. When you take a loan out of your 401k you actually pay the loan back with after tax money that goes into the Pre tax source. Then ofcourse in the future when you w/d the money it gets taxed again.
Just want clarity thanks for the vids!
Can I take 100k out of my 401k and then put it back in my Roth IRA instead of putting it back into my 401k paying taxes over the next 3 years? Thank you
Thank you thank you thank you for that awesome information
Please if you have a chance can you talk a little bit more about the Roth IRA are you able to take money out from there or just take out what are you accumulated
What about Roth IRA