While taking money out of your 401(k) may seem like an easy option during a time of financial need, the repercussions of that decision could be devastating to your financial future. What may seem like a “quick fix” in the moment can cause ripple effects of damage for years to come. There are many reasons why utilizing a daily pay benefit is a much safer and more sustainable option. A few of the biggest reasons are outlined below:
1) A DailyPay transfer is not a loan, so you don’t have to pay it back
There are no repayments or interest fees when you transfer funds from DailyPay. You can only pull from your own earned but unpaid wages, which acts as a safety net against accumulating more debt. That money is already rightly yours in this moment, unlike the money in your 401(k). While it may seem like you’re just pulling money from one of your own savings accounts, this is actually a very serious loan. Borrowing from a 401(k) usually involves excessive fees, including set-up fees, administrative fees and more, on top of the interest rate and tax penalty.
2) DailyPay can be relied on consistently with no penalties
On-demand pay is a financial cushion you can depend on as often as you need it. It can be a lifesaver in an emergency, but it can also help you make monthly bill payments on time to avoid late fees, overdraft fees and eventually help you get out of debt. By encouraging responsible spending, while also providing a safety net for unforeseen financial needs, DailyPay is a much better solution to depend on for the long-term. Taking a loan from a 401(k) should be done much less frequently, if at all, to remain in good financial health.
3) A change in job status may require immediate 401(k) loan repayment
In the event of your termination from a company, whether voluntary or involuntary, you may be required to pay back the loan in as few as 60 days. It is a dangerous risk to take, and one that can put you in a worse state of financial stress than when you took out the loan in the first place. Even repaying a large loan in the five years required for all 401(k) loans could create years of stress and struggle, although it may seem like plenty of time initially. On the other hand, there is no penalty from DailyPay whatsoever in the event of your resignation or termination.
4) You’ll pay double the taxes on a 401(k) loan
While using DailyPay won’t change anything when you file or pay your taxes, taking out a 401(k) loan creates costly and often confusing issues during tax season. On top of the fees, you will be taxed when you take the money out, and you will be forced to repay the loan with after-tax dollars. This doesn’t even factor in the steep additional tax penalties you can receive for not paying off the loan in a timely manner.
Typically, the penalty for withdrawing from a 401(k) before the age of 59½ is 10% of the distribution, plus an automatic withholding of at least 20% for taxes. But with the passage of the CARES Act, that all changed in 2020.
5) Using DailyPay will eliminate the administrative burden for your employer
When you take a loan from your 401(k), it creates a huge administrative burden for your employer. Between the tax audits and the paperwork, this type of loan creates a ton of extra work for both you and your employer when tax season rolls around. Additionally, depending on the structure of your specific 401(k) plan, your employer may be able to forbid you to contribute to your 401(k) for the entire duration of the loan repayment. This means that you are miss out on saving money in a high-interest account, and you will be unable to receive matching contributions from your employer.
Keep in mind, given all the concerns with taking a 401(k) loan that what may have seemed like an easy solution can quickly turn into a nightmare for all involved, and it can be dragged on for years to come.