401k as cash reserves?

NEW -> Contingent Buyer Assistance Program
<p>graphrix: The legal requirement is that employers cannot force you out of the plan when you leave servce if your balance is greater than $5,000. They may impose a "special fee" for former employees who leave their balance there, but they cannot force you out. (Minor side note- new rules have lowered that limit to $1,000. For balances between $1k - $5k they can force out into an IRA established by the employer.)</p>

<p>oc_fliptrack: <em>"If I and my employer part ways, the 401k loan must be repaid with 60(?) days."</em></p>

<p>This totally depends on the loan policy used by your employer's plan. Some policies that I have come across allow former employees to continue making loan payments via cashier's check directly to the provider. Some other loan policies allow you to rollover your loan to a new employer as long as it is not delinquent. The companion or counterpart to that is you would want to make sure your new employer's 401(k) loan policy allows you to bring in a rollover of a loan (i.e. a promissory note, not real cash) into the plan. You want to make sure your "1099-R" shows that the entire balance including the loan is a rollover. So, needless to say, but good to say it anyway, before taking a loan out read the law and your company loan policy carefully.</p>

<p>The IRS loan default rules (which trigger a taxable event) in essence state that the remaining loan balances should be "deemed distributed" if it is in arrears for more than a quarter (90 days). Many providers follow a loan default process at the end of each calendar quarter. So for 3/31/07, if payments on a loan have not been received since before 12/31/06, the loan will be defaulted say on 4/1/07and will trigger a 1099-R for the amount of the loan. You want to make sure to take this into consideration at termination of employment, and looking at timing of doing a rollover.</p>

<p>Here's a <a href="http://www.reish.com/publications/pdf/partpolproc.pdf">sample loan policy</a> so you know what it looks like. Sometimes this is given with your "SPD-Summary Plan Description" when you first become eligible for the plan, or separately when you request a loan. Best to ask for it upfront before you initiate the loan.</p>

<p>Here's a link to a great resource on 401(k) loans:</p>

<p><a href="http://www.401khelpcenter.com/cw/cw_loans.html">401(k) Help Center</a></p>
 
<p><em>However, I know of at least one situation where someone was "gently urged" by the bank (illegally) in a BK case to take a 401(k) hardship withdrawal to payback a delinquent bank loan.</em></p>

<p>I would never. A 401k is like having a coffee can full of bullion buried in the yard. Except the wife knows where it is (dissolution of marriage seems to be the only thing that can wipe out a 401k).</p>
 
<p>I also would never <strong>want</strong> to withdraw my 401k, but I would have a hard time believing that the banks will allow me to keep my money in my 401k if I have 400k in my retirement account and I can't make the monthly loan payments.</p>

<p><a href="http://blog.davidmillions.com">My Own Millions Blog</a></p>
 
<p>MyOwn, I don't think the banks have a choice. These funds are protected under ERISA law. However, I did read that the recent BK reform changed the laws regarding IRA's. Any amount over $1MM is fair game provided it didn't come from a 401k rollover. </p>
 
<p>That is good to know (for those that do get in trouble) but I don't see the logic behind the protection. I understand that the protection keeps us from getting into too much trouble but if we owe money, why are part of our savings protected </p>

<p><a href="http://blog.davidmillions.com">My Own Millions Blog</a></p>
 
MyOwnMillions,





I think the theory is with ERISA protection that we as a society do not want our senior citizens dependent on social security and eating dog food.
 
<p>I'm not sure I agree with the protection. I realized that in a highly developed society, we always try to keep the gap between the weathy and poor small, but I don't see why people should not be penalized for stupidity. We have these things all over the place, high taxes, social securities, etc. Some other asian countries' taxes are so low and yet they don't have near as many money problems as we do.</p>

<p>Oh well, I love this country anyway.</p>
 
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