Until recently, rising home prices and easy credit made it convenient for start up business owners to tap their home equity for debt consolidation or expansion capital. But, with the housing market now in a slump and credit standards being tightened more people are starting to research other means to raise cash in a lump sum. "We are receiving a lot more inquiries about the 401(k) loan," says Daniel Lamaute retirement plan advisor at Lamaute Capital, Inc. - InvestSafe.com (www.InvestSafe.com)
Features of a 401(k) loan that some find attractive are:
1. It requires little paperwork, and there's no credit check.
2. The principal and interest on a 401(k) loan are deposited in the owner's 401(k) account - so borrowers pay interest to themselves, not to a bank or other lender.
3. There are no taxes on early withdrawals as long as the loan is repaid on time according to the loan terms.
4. The interest rate on many 401(k) loans is set at prime rate and is fixed for the term of the loan, usually 5 years.
5. The 401(k) loan can be used for any purpose.
Employees can ask their employer if their 401(k) plan allows loans. Once an employee quits his job he generally can no longer borrow from his 401(k). But individuals with their own business (part-time or full-time) and with no employees can open their own Solo 401k plan and borrow from it, according to Lamaute.
However, defaulting on a 401(k) loan is very costly. The defaulted 401(k) loan balance will be subject to tax and a possible 10 percent tax penalty. One should consult with a financial advisor and have a very good reason before touching one's nest egg.
It's possible to transfer funds from IRAs, 401(k) from a previous employer, SEP plan or other qualified retirement funds to a Solo 401(k) plan and borrow up to a maximum of $50,000 or 50% of the Solo 401(k) account balance, whichever is less.
Lamaute Capital, Inc., (www.InvestSafe.com) is an investment firm that specializes in setting up retirement plans
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