To clients who need cash, a loan from their company retirement plan can look like easy money. Credit checks are not required, so the client does not face a lengthy approval process, and the interest rates available on plan loans are often very favorable. Such a loan can be a good option for a client with problems getting credit at an affordable rate.
But these loans carry some danger as well. There are a variety of complex rules that must be followed, and breaking those rules can have serious tax consequences. A loan that is considered in default is deemed a distribution of the retirement plan. This results in the balance being taxable and possibly subject to a 10% early distribution penalty.
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