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J.G. Wentworth Blog

Selling Structured Settlement Payments Vs. Borrowing From Your 401(k)

Hi everyone.  J.G. Wentworth here.

I’m continuing my blog series on structured settlement funding versus other ways you can getcash when you need it.  In this particular post, I’m comparing selling some or all of yourstructured settlement payments versus borrowing from your 401(k) plan.

Borrowing from your 401(k)

Positives:

  • It’s quick.  Sometimes you can access cash within 24 hours if your plan sponsor offers a wire transfer option.
  • There’s no credit check.
  • It’s easy.  Plans vary, but you may be able to get cash by making a single phone call or a short loan form.
  • Save on Fees.  When you borrow from your 401(k) plan, there are no costs associated other than the interest you repay yourself.  You do not have to pay the extremely high Credit Card APRs, late payment fees, overdraft interest, etc.
  • Repayment Flexibility – most 401(k) plans allow a 5 year amortization repayment schedule, however your loan can be paid of faster with no prepayment penalties.

Negatives:

  • You need to have a 401(k) plan in the first place.  Not all employers offer these plans. Unfortunately, if your employer doesn’t, you’re out of luck.
  • Your particular 401(k) plan may not allow you to borrow from it.  You’ll need to check this out.
  • You lose steam in your 401(k) plan.  The money that you borrow means there is less to earn interest, dividends and capital gains.
  • If you don’t repay the loan and you are younger than 59 ½, it will be considered an early distribution and you will owe state and federal income taxes as well as a 10% penalty for making an early withdrawal.
  • The loan isn’t tax deductible.  It’s considered a consumer loan, so there is no tax advantage.

Compared to Selling Structured Settlement Payments

Borrowing from your 401(k) may be the way to go if you need relatively small amounts of money, say $10,000 or less.  If you need more cash than this, selling some of your structured settlement payments offers a number of compelling benefits:

  • When you sell structured settlement payments, you do not create more debt that you have to repay.
  • When you sell structured settlement payments, you don’t risk being charged a 10% penalty by the federal government.
  • When you sell some of your structured settlement payments, you don’t diminish the value of the payments that you didn’t sell.  Remember, when you borrow from your 401(k), you reduce its power to earn interest, dividends and capital gains.  While the money eventually gets back into your 401(k), the lost investment income is permanent.

These are compelling benefits but must be balanced against the fact that selling payments requires you to go to court and generally takes longer and is more difficult than getting cash from your 401(k).  Still for larger amounts of money, it may be the best way to go for most folks.