Finding Money in a Credit Crunch
Copyright © 2008 Daniel Lamaute
The credit crunch coupled with a recession means that access to capital has become scarce for most businesses and individuals alike. The crashing home prices have wiped away the ability of most individuals and small business owners to obtain cash from home equity withdrawals or in refinancing their house.
Credit cards are convenient but have never made sense for long term borrowing. Most of them have fees and interest rates that can strangle or trap the user in perpetual debt. An added consideration is that the bankruptcy rules have credit card debts next to impossible for one to shake off and start afresh.
It is a truism that the worst time to look for a loan is when you need one. So how does one find cash in a crunch? The most sensible way of course is to over time build a store of emergency cash fund by spending less than your income. For those who have not accumulated a stash of cash, an alternative might be to look at your other assets such as an IRA or 401(k).
Generally, withdrawals from an IRA or 401K are taxed at ordinary income rates, plus 10% penalty for those younger than 59 1/2. However, one can take up to a 60 day loan from an IRA without incurring tax penalties. And one can borrow money from a 401(k) generally to be paid back within 5 years. Borrowing from a 401(k) can be free of tax and tax penalty provided the loan is paid back on schedule.
Some who do not have a 401(k) with a loan privilege may be able to qualify to set up their own Self-Employed 401(k) with a loan feature. You can have a Self-Employed 401k if you have a business and no employees with the exception of other owners or a spouse. The business can be a new business or several years old, and the business can be in the form of a sole proprietorship, partnership, Limited Liability Company (LLC) or corporation.
It’s possible to roll over an existing IRA or 401k from a previous employer into their Self-Employed 401k plan. After establishing a Self-Employed 401k a small business owner can borrow up to $50,000, or one half of their 401k account balance, whichever is less.
A 401k loan is quick and easy to obtain because it comes out of your 401k balance. The loan can be used for any purpose. The loan interest is fixed at prime rate for the duration of the loan. Typically the loan must be repaid in equal installments over a five-year period. The loan payments, interest and principal, go back to your 401k account, so you are in essence paying yourself back.
Taking money out of a retirement account as a loan or withdrawal is not a decision to be taken lightly. It takes years to build up a nest egg and minutes to spend it. So make sure you have a solid reason and good use for the money before removing assets from your tax-deferred plan.
Anyone can visit www.investsafe.com to get more information kit on the 401K plan for the self-employed and small business owner.
About The Author:
Daniel Lamaute, Lamaute Capital, Inc. an investment brokerage firm that specializes in retirement plans for small business owners. Tax laws and regulations are complex and subject to change. Please consult your tax professional before making any investment decisions. http://www.InvestSafe.com |
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Comment from Bill Indebt
Time: November 21, 2008, 2:07 pm
Good advice but seems a risky strategy for more mature people. It is this group of people who are having a tough time if they lose their job. Not time to retrain. Ageism - whatever the local laws - is still an issue.
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