Your 401(k) Plan may allow you to borrow against your account to meet your current financial needs.

Ideally, during your working years you will be putting money into your retirement plan rather than taking it out. However, sometimes current financial demands must take precedence over your future retirement needs. In those instances, it is nice to know that your retirement plan is very flexible and will allow you to borrow against your account without incurring a taxable event.

How Much Can I Take?

While the government allows you to borrow from your retirement account without having to pay taxes on your outstanding loan balance, there are rules that must be followed. The general rule of thumb is that you can never borrow more than 50% of your vested account balance. However, if you are borrowing a large sum or if you have a current outstanding loan, be aware that the IRS imposes additional constraints as well. Regardless of your vested account balance, you can never borrow more than $50,000 and, if you had a loan outstanding recently, you cannot borrow more than $50,000 minus your highest outstanding loan amount in the past 12 months. For instance, if your current vested account balance is $120,000 and if you had a $30,000 loan outstanding during the past year (even if it is paid off currently), then the maximum new loan you may take is $20,000.

How Do I Pay It Back?

When you borrow from your retirement account, you are effectively borrowing from yourself. While the plan is required to charge you a reasonable rate of interest (i.e. prime plus 2%), the interest you pay is credited back to your account. Your loan repayments will be deducted automatically from your paycheck on an after-tax basis, but you may payoff the loan at any time without prepayment penalties. For standard loans, you must pay back the loan in full within a 5 year period. If the loan will be used to purchase a primary residence, then you may take as long as 15 years to pay back your loan. To qualify for a primary residence loan, you must submit a copy of your Purchase Agreement with your loan application.

Any tax advice contained in this communication (including any attachments) is neither intended nor written to be used, and cannot be used, to avoid penalties under the Internal Revenue Code or to promote, market or recommend to anyone a transaction or matter addressed herein. BlueStar Retirement Services, Inc. This bulletin is published as a general informational source. This information is general in nature and is not intended to constitute legal advice in any particular matter. BlueStar Retirement Services, Inc. does not warrant and is not responsible for errors or omissions in the content of this report.