Does anyone have experience with borrowing against 401k to help pay for adoption expenses? My Dh and I had been planning on that and just found out we will not be able to. His company does not think adoption would qualify as a hardship withdrawl. What's up with that? I was hoping someone could give us advice-I'm thinking his co. might just be uneducated? If not, that sure crashed our adoption budget.
Hi Liz,
My husband is a financial advisor and he said to get an actual copy of the 401k plan and look at rules for getting a loan against your plan. I guess the rules for 401K plans vary (news to me, too). I suppose you could always withdraw the money and pay penalty and taxes....
Good Luck to you,
We borrowed against our 401k several years ago for our first adoption (failed) and I do believe you can borrow smaller amounts without the hardship withdrawal. The problem is that my husband then lost his job of 9 years which we thought was quite secure. We could not pay back the loan and so we had to withdraw the whole thing and took the 10% penalty AND had to pay $5000 in taxes the following year. It was a very painful lesson for us and I thought it may end our dream of ever adopting. Thankfully we were able to refinance our mortgage two years later and were able to take out a home equity loan.
It's always a risk to borrow from your 401k but it is your own money that you are borrowing.
Adoption does not count for a hardship withdrawal...a withdrawal from the 401(k) that does not require 10% penalty and is not paid back.
However, most plans have the availability of plan loans where you can get a loan for up to 1/2 of your vested 401(k) balance. It is paid back with payments straight from your paycheck and is usually 7-9% interest.
The downside is if you change jobs or lose your job you will have to either pay it all back immediately or have it considered an early withdrawal subject to 10% penalty and added as taxable income the year it was declared a withdrawal.
On the other hand, all vested 401(k) funds are yours and you can choose to withdraw it at any time if you are willing to pay the 10% penalty and include it as taxes for that year. If you do this, most plans have a 6-12mo period where you may not contribute to the 401(k) plan.
I looked into this, but it turned out to be more beneficial to take out a home equity loan. The rates are low and the amount of investments you will miss out on if you take a loan from your 401 may not be worth it in the long run.