Saturday, November 15, 2008


AARP Finance - Is it worth borrowing money from your 401(k) fund. Generally you need to keep the money in the plan until you reach age 59 ½. Withdraw any of it before then and you'll be hit with a bruising 10% early withdrawal penalty, on top of the regular income tax that is due on withdrawals from contribution plans.

There are exceptions that AARP members might consider. The IRS waives the 10% penalty for certain "hardship" withdrawals. Each plan's rules vary (check yours to be sure), but you may be able take money out of your retirement account penalty-free before age 59 ½ if you use it for:

  • Purchasing your first home Expenses
  • After the onset of a sudden disability
  • Higher education expenses (like college for your kids)
  • Payments you make to prevent eviction or foreclosure.Don't count on it, though
This money is locked up until retirement for a very good reason: If AARP members spend it now, they risk jeopardizing their financial security when you're older.

If AARP members can't get the money anywhere else, their best option is probably a loan. Many defined contribution plans allow AARP members to borrow against the amount in your account. You must repay the money to your account within a set period - usually a few years - or the loan is treated as a withdrawal, meaning you'll owe taxes and a 10% penalty on it.

There are three main drawbacks for AARP members to consider when taking out a loan. First, it reduces the money they have growing for their retirement years. Second, they have to pay interest on the amount they borrow - typically the prime rate plus one percentage point - though they do pay the interest to themselves. Third, AARP members must repay any outstanding loan within a few months if you are laid off or decide to change jobs.

David Ogden - Tomorrows Home Business
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