Which is the Best Option – 401k Loans Vs Selling Your Annuity For Cash?

  

According to Kiplinger.com, there has been a significant increase in the amount of 401k participants that are borrowing against retirement savings. These borrowers have cash discount merchant services  most likely fallen on hard times if they are willing to borrow against their retirement fund. The 401k participants think that borrowing against their 401k is a good idea. However there are financial issues that need to be considered before you tap your 401k for cash. So I wondered which is better-borrowing against your 401k or selling your annuity for cash.

The Pros of borrowing against your 401K [1]

If you default on the loan, it won’t hurt your credit

The interest you pay goes into your 401k account

The money is taken out of your check as a payroll deduction

The interest paid on the loan is significantly less than most credit cards

The Cons of borrowing against your 401k [1]

If you default on the loan, you will have to pay income tax plus an early withdrawal fee on the unpaid balance

If you quit or loss your job you have to pay the loan back within 60 days or you will have to pay income tax and an early withdrawal fee

If the amount you are paying in interest on the loan is less than the amount of interest your money was earning through investments you are actually losing money

You have to pay the money back within 5 years unless you used the money to buy a home

If you default there is a loss of future retirement income

The Pros of selling your annuity for cash

Get access to your cash immediately

You do not have to pay it back

There is no defaulting or affect on your credit score

You don’t have to sell all your payments

The discount rate is usually less than credit card interest rates and high interest mortgage rates

You can re-invest any remaining money in other investments with higher returns and lower tax consequences

The Cons of selling your annuity for cash

If you needed the money as a steady source of income in the future you will not have it unless you reinvested the lump sum into another investment

By receiving your future payments today, they may lose value slightly, this is known as discounting

Conclusion

In these uncertain times there is a real possibility of losing your job. Will you be able to pay back the loan if that happens? Will have be able to pay the taxes and the withdrawal fee? Withdrawal fees are usually around 10% [1]. Do you have other retirement income, not including social security, which you can live on?

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