Exploring Superior Alternatives to 401(k) Loans: Unveiling the Options for Merck Employees

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For Merck employees, alternatives to 401(k) loans - such as liquidating non-retirement assets or exploring home equity options - 'can preserve long-term retirement savings while meeting short-term needs while preserving long-term security.'

'Merck employees nearing retirement should consider 401(k) loan alternatives, as drawing down retirement funds too early may jeopardize their financial future;' exploring unsecured loans or home equity lines of credit might give you more freedom without sacrificing your retirement goals, 'she said.

In this article we will discuss:

1. Finding alternatives to 401(k) loans for financial need.

2. Key options for getting cash fast without sacrificing retirement savings.

3. The tax consequences & advantages of each alternative.

Some people - including Merck workers - may need to tap into a 401(k) loan in times of need. But look into alternatives to 401(k) loans that may offer more benefit to your situation and long-term goals. A few options for getting quick cash while preserving your retirement savings are discussed below.

Exploring these alternatives enables people nearing retirement or already retired to make informed decisions based on their particular situation. Preservation and growth of retirement funds must be prioritized alongside immediate needs. Knowing which options exist lets individuals strike a balance between needing to access funds and preserving their retirement savings over a long period of time.

Research from the Investment Company Institute (ICI) found that more than eight out of 10 workers have taken out a 401(k) loan. Yet, by 2020 only about one in 10 people with that option had used it. This suggests people either know about the drawbacks of 401(k) loans or may need more money than a 401(k) loan can provide.

401(k) loans have one catch - IRS rules cap plan loans at 50% of your vested balance or $50,000, whichever is less. For example, you could borrow $9,000 when your 401(k) balance is about the median $18,000. Furthermore, at end 2020 the average unpaid balance of 401(k) loans was less than $8,000 and the median was just over $4,000. Thus a 401(k) loan might not cover your needs.

With limitations like 401(k) loans, here are alternatives that may be better suited for you:

Liquidate Company Stock:

If you own company stock from an employee stock purchase plan (ESPP), selling it can give you instant cash. Stopping contributions to the ESPP may also boost your taxable pay. Selling company stock may raise your tax bill, but losses could allow tax-loss harvesting. Stocks held for one year or less will have short-term capital gains tax rates that are generally higher than long-term rates.

Liquidate Other Assets:

Stocks, bonds or cryptocurrencies in a taxable brokerage account can bring in cash when you sell them. Remember the taxes involved in selling these assets. Selling non-financial assets like unused items or collectibles can also raise funds. Consider also that some payment apps like PayPal and Venmo now issue 1099-Ks - making gains harder to hide from the IRS. Collectibles also carry higher capital gains tax rates.

Reduce Retirement Contributions:

Not every option will give you an instant lump sum, but it frees up monthly cash flow that can be invested elsewhere. Reduced retirement contributions can be redirected to current spending.

Explore Unsecured Loans:

When you lack assets to sell or cannot justify selling them, unsecured loans may be an alternative to 401(k) loans. They work if you don't own a home or lack the equity to borrow against. There are 0% APR credit cards and personal loans.

0% APR Credit Cards:

You can get a 0% APR credit card and spend your money on purchases without paying interest for up to 12 months with minimum monthly payments on time. Others include no annual fees and sign-up bonuses. But failing to pay off the balance before the introductory period ends or missing a monthly payment will carry interest charges that rival those on a 401(k) loan. Those who are disciplined and organized with their money may choose this option.

Personal Loans:

Within a few business days, personal loans let you get a lump sum of $1,000 to $50,000 in several business days. They have fixed interest rates and repayment can be between two and seven years. Good credit can even get you rates on par with the highest high yield savings accounts. But borrowers with sub-average credit could pay up to 36% interest. 401(k) loans would then be more affordable.

For Homeowners 401(k) Loan Alternatives & Tips:

If you own a home with more than 20% equity, you may find borrowing money through these options more advantageous than tapping into retirement savings:

Home Equity Loan:

You borrow a lump sum at a fixed rate and pay it back in equal monthly installments over up to 30 years with a home equity loan. Home equity loans carry interest rates a couple of percentage points lower than personal loans. Note there could be closing costs of 2% to 5% of the borrowed amount. Ideally this is for a large sum with low interest rates.

HELOC - Home Equity Line of Credit:

A HELOC lets you borrow up to your credit limit. A HELOC's interest rate is variable based on market conditions; therefore, monthly payments can be somewhat unpredictable. During the draw period - up to 10 years - you may be required to make interest-only payments. The repayment period is up to 20 years and includes full amortized principal and interest payments. Some lenders waive closing costs if the credit line remains open for three years. HELOCs let you borrow a large amount or less - depending on your needs.

Cash-Out Refinance:

With a cash-out refinance, you get another, larger mortgage. That extra amount is given to you as cash. Or choose a fixed-rate loan for up to 30 years with consistent monthly payments.

Also available:

adjustable-rate loans. Like a home equity loan, closing costs will be between 2% and 5%. This is helpful if you planned to refinance anyway.

Explore these options for alternatives to 401(k) loans so that you can make sound financial decisions and still protect your retirement savings. Assess each option's advantages, including immediate availability, interest rates, repayment terms and potential tax implications. Always consult with a financial advisor or professional about which alternative is best for your long-term financial picture.

Best alternatives to 401(k) loans:

some employers - including Merck - offer an 'in-service distribution' or 'in-service withdrawal,' which lets people 59 1/2 or older take money out of their 401(k) while they work. A survey by Willis Towers Watson in 2021 found that about 56% of the top 500 US companies offer this option, giving retirees and those nearing retirement age more control over their retirement savings. Exploring this alternative can be advantageous - people can access their money without the risk of 401(k) loans (source: Willis Towers Watson, 2021).

Find best 401(k) loan alternatives like diving into a chest of financial goodies as you cruise through retirement waters. Like a seasoned sailor searching for ways out of troubled waters, Merck workers and retirees search for better financial decisions. Instead of relying on a 401(k) loan alone, use these other vessels to get you there. Selling company stock is like pulling open an ancient chest of treasure, and liquidating other assets is like pulling up old artifacts in your attic. You trim your retirement contributions so the sails are adjusted for better cash flow. Both secured loans and home equity become versatile ships that offer advantages of each kind. Having knowledge and navigation skills can help you sail toward financial security while preserving your retirement savings while meeting your present needs.

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Sources:

1. Kiplinger Staff. 'Considering a 401(k) Loan? What You Can Do Instead.'   Kiplinger , Oct. 2023.

2. Thrivent Financial. 'Borrowing From 401(K) Plans: The Basics, Pros, Cons & Alternatives.'   Thrivent , Sept. 2023.

3. Forbes Advisor. 'Best 401(k) Loan Alternatives.'   Forbes , Aug. 2023.

4. Citizens Bank. 'Home Equity vs. 401(K) Loan.'   Citizens Bank , July 2023.

5. Best Egg. '401(K) Loan vs. Personal Loan: How to Choose.'   Best Egg , Nov. 2024.