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If you are among the 13% of 401(K) savers with an outstanding loan, it is expected you will either have to pay it quickly, or the loan gets deducted from your outstanding account balance
Several economic disruptions have occurred since the novel coronavirus was announced as a global pandemic. As many people get laid off by their employers, the situation on the ground is becoming tougher by the day. As a result, a 401(K) loan is being considered as a better option to save most families that may have lost their jobs due to the coronavirus pandemic.
Since its inception in 1978, it has grown tremendously to become the most popular plan among employers. This is because it is much more relatively flexible than other plans in the market. According to the act on the plan, one is allowed to borrow 50% of the vested balance up to a limit of $50,000. The loan is expected to be repaid in five years, otherwise, it attracts some penalties including from the taxman.
According to a report by Vanguard’s 2019, How America Saves, 13% of all the 401(K) savers have an outstanding loan. The number is expected to rise if the current environment where coronavirus is threatening most lives prevail for a long period.
What to Expect if You Have 401(K) Loan and Become Jobless amid Coronavirus
At the end of the first quarter of 2020, millions of people lost their jobs in the United States due to coronavirus pandemic. The figures that are observed now have not been seen in recent American history. As a result, most benefits that come with employment are cut short unexpectedly. Some of the notable include health benefits, a regular stream of income and many more.
The coronavirus situation has significantly increased the number of people on 401(K) loans. And according to the current act, if you lose your job and have an outstanding loan, you are to pay the amount in full or the loan gets deducted from your balance.
Although there are a number of reliefs due to the coronavirus pandemic, your loan from 401(K) plan could change slowly into a distribution that comes with taxes and an early withdrawal penalty. According to the executive director of the Plan Sponsor Council of America Will Hansen, if an individual gets laid off, it can speed up the time of repayment.
Even as the CARES act makes some notable changes to meet the current financial situation caused by the coronavirus, it does not include loans that are unrelated to the coronavirus pandemic. However, if you are 55 years old and below at the time of job dismissal, you can pay a 10% early withdrawal penalty.