Exploring 401(K) Loan Options With One America

OneAmerica Financial is a mutual organisation that offers strategic financial education and top-quality life insurance, retirement and employee benefits products. While it is not clear if OneAmerica does 401(k) loans, it does offer financial products and services. A 401(k) loan allows individuals to borrow from their retirement account, with the loan amount generally being the lesser of 50% of their vested balance or $50,000. These loans typically have a five-year repayment schedule and are repaid using after-tax dollars through payroll deductions.

Borrowing limits

It is important to note that the maximum loan amount may be restricted to certain sources and offset by other outstanding loans. The daily account value fluctuations can also impact the amount available for withdrawal. If the requested loan amount exceeds the available funds at the time of processing, the loan request will be adjusted to the maximum amount available.

Most 401(k) loans must be repaid within five years, except for loans used for purchasing a primary residence, which can have a longer repayment period of up to 30 years. Repayments are typically made through payroll withholding, and participants must enter into a payroll deduction agreement with their employer.

While 401(k) loans offer quick access to funds without the lengthy applications or credit checks associated with traditional loans, they do come with certain risks and potential downsides. These include the possibility of double taxation on loan interest, the opportunity cost of investing the borrowed funds, and the risk of default if employment status changes.

Loan duration

The loan duration for a 401(k) loan from One America must be at least one year, but not more than five years. However, loans for the purchase of a primary residence can be from one to 30 years. The minimum amount that can be borrowed is $1,000, and the maximum amount is 50% of the vested account value, up to $50,000.

It's important to note that 401(k) plans are not required to offer loans, and not all providers will approve a 401(k) loan. If a plan does offer loans, anyone can take one out as long as they meet the plan requirements. There are no credit checks or debt-to-income ratio requirements. The loan will carry the same interest rate throughout its term, and repayments are made via payroll withholding. This means that even during a leave of absence, repayments are due, although the payroll deduction can be waived for this period.

When considering a 401(k) loan, it's important to be aware of the potential consequences of not repaying the loan on time. If you are under the age of 59 and a half, you will be subject to income taxes and early withdrawal penalties if you cannot repay the loan. This can have a significant impact on your retirement savings, as it may reduce the amount you can contribute each month. Therefore, it is crucial to have a repayment plan in place and to consider how you will handle leaving your job, as you may be required to repay the full balance immediately.

Loan distribution

A 401(k) loan is borrowed from an individual's retirement savings account. The amount that can be borrowed depends on the employer's plan, but it is typically up to 50% of the vested account balance or $50,000, whichever is less. An exception to this limit is if 50% of the vested account balance is less than $10,000, in which case the participant may borrow up to $10,000. The loan must be repaid within five years, and the borrower must also pay interest on the loan amount. This interest is typically set by the plan administrator and is intended to provide a return comparable to lending institutions in the same geographic area. The interest paid on the loan goes back into the borrower's retirement plan account.

Loan repayments are typically made via payroll withholding, and the borrower must enter into a payroll deduction agreement with their employer. If the borrower leaves their job before repaying the loan, they may have to repay the full amount within a short time frame. If they are unable to repay the loan for any reason, it is considered defaulted, and they will owe taxes and a 10% penalty on the outstanding balance if they are under 59 and a half years old.

The process of obtaining a 401(k) loan typically involves the following steps:

• The borrower must determine the amount they wish to borrow, ensuring it is within the allowed range based on their vested account balance and the plan's limits.
• The borrower may need to obtain spousal consent and certification of marital status, especially if they are married.
• The borrower must provide any supporting information deemed necessary by the plan administrator, such as employment status and income verification.
• The plan administrator will determine the source withdrawal sequence for the loan distribution based on the rules outlined in the loan procedures. Withdrawals are typically made from investment options on a pro-rata basis.
• The borrower will then receive the loan amount and begin making repayments via payroll withholding.

It is important to note that not all 401(k) providers will approve a loan, and there may be restrictions on the total number of outstanding loans and the time between loan issuances. Additionally, borrowing from a 401(k) can have potential drawbacks, such as missing out on investment growth and employer contribution matches during the repayment period. Therefore, it is essential to carefully consider the pros and cons before deciding to take out a 401(k) loan.

Loan repayment

While I could not find information specific to One America, I did find some general information about 401(k) loan repayment.

Retirement plans may offer loans to participants, but a plan sponsor is not required to include loan provisions in its plan. Profit-sharing, money purchase, 401(k), 403(b), and 457(b) plans may offer loans. IRAs and IRA-based plans cannot offer participant loans. To determine if a plan offers loans, check with the plan sponsor or the Summary Plan Description.

The maximum amount a participant may borrow from their plan is 50% of their vested account balance or $50,000, whichever is less. An exception to this limit is if 50% of the vested account balance is less than $10,000: in that case, the participant may borrow up to $10,000.

Generally, the employee must repay a plan loan within five years and must make payments at least quarterly. The law provides an exception to the 5-year requirement if the employee uses the loan to purchase a primary residence. In this case, the loan may be paid back over a period of more than 5 years.

If the employee is unable to repay the loan, the employer will treat it as a distribution and report it to the IRS on Form 1099-R. The employee can avoid the immediate income tax consequences by rolling over all or part of the loan's outstanding balance to an IRA or eligible retirement plan by the due date for filing the Federal income tax return for the year in which the loan is treated as distributed.

Loans that exceed the maximum amount or do not follow the required repayment schedule are considered "deemed distributions". If the loan repayments are not made at least quarterly, the remaining balance is treated as a distribution that is subject to income tax and may be subject to the 10% early distribution tax.

If a participant fails to make payments on a plan loan, the missed payments can still be made even after a deemed distribution has occurred. In that case, the participant's or beneficiary's tax basis under the plan is increased by the amount of the late repayments.

A plan may suspend loan repayments for employees performing military service or during a leave of absence of up to one year. However, upon return, the participant must make up the missed payments either by increasing the amount of each monthly payment or by paying a lump sum at the end.

Some qualified plans require a participant's spouse's written consent before giving a loan greater than $5,000. Other qualified plans may not require the participant's spouse to sign for a loan, regardless of the amount, if the plan meets certain conditions.

Tax implications

Borrowing from your 401(k) plan can be an attractive option when you need short-term liquidity. However, there are tax implications to consider before taking out a 401(k) loan.

Firstly, it's important to understand that 401(k) loans are not tax-efficient. When you repay a 401(k) loan, you use after-tax dollars, which means the repayment is subject to double taxation. This is because you are taxed on the money you contribute to your 401(k), and then taxed again when you withdraw that money to repay the loan. However, only the interest portion of the repayment is subject to double taxation, and the cost of this is usually fairly small compared to other short-term liquidity options.

When deciding whether to take out a 401(k) loan, it's essential to consider the opportunity cost of lost investment earnings. While your money is loaned out, it is not earning the returns it could have generated if it had remained invested. This can impact your retirement savings, but if any lost investment earnings match the "interest" paid on the loan, there will be no negative impact on your retirement.

Additionally, there are specific rules and restrictions around 401(k) loans that can impact their tax implications. For example, the loan must be adequately secured, and the minimum amount is typically $1,000, with a maximum of $50,000. The duration of the loan is usually between one and five years, but loans for the purchase of a primary residence can be up to 30 years. Repayments are generally made through payroll deductions, and the loan must be repaid with interest, which is determined by the plan administrator.

It's also important to consider what happens if you are unable to repay the loan. If your employment status changes or you terminate your employment before the loan is fully repaid, you may be in default. This can have significant tax implications, as any outstanding loan balance may be considered a distribution, which could result in taxes and penalties. Therefore, it is crucial to carefully consider your ability to repay the loan before borrowing from your 401(k).

Frequently asked questions