Strategies to Keep Working Capital High: A Money Services BlogStrategies to Keep Working Capital High: A Money Services Blog

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Strategies to Keep Working Capital High: A Money Services Blog

Hi, my name is Mike, and I have been a business owner for ten years. I run a restaurant, and although it receives a lot of cash, we also have a lot of payroll expenses and a lot of vendor bills. As a result, I sometimes have to get creative about creating working capital. Through the years, I have boosted our working capital in a variety of ways including taking out loans and cash advances. I have also done other creative things. If you want to keep your working capital high to make your business successful, read these posts on money services. They have the secrets you need to succeed.

Minimizing The Cost Of Debt With A 401(K) Loan

The focus of financial planning is saving for the future, but the overall objective also includes minimizing the cost of any personal debt. Participants in a 401(k) plan may be eligible to receive a loan from their retirement plan on better terms than from traditional lending sources.

All 401(k) plans do not allow participants to take out loans. For plans that provide for loans, the interest rate may be more favorable than the rates available from banks or credit cards. Although it detracts from your long-term financial goals, borrowing from your 401(k) account may be one of the better short-term funding options available.

Loan limits

You may borrow up to 50 percent of the vested balance in your account, up to a maximum of $50,000. Some plans provide an exception for smaller account balances. If half of your vested 401(k) balance is less than $10,000, the loan exception may allow you to borrow up to $10,000 of your account balance. A 401(k) loan is generally not subject to an early withdrawal penalty if you remain at the company while the loan is repaid as agreed.

Additional tax cost

Even though you are essentially paying interest back to yourself, there is an inherent planning drawback in repaying a 401(k) loan. Loan payments do not count as original plan contributions. The dollars used to pay back the loan are post-tax, meaning that you have paid tax on them. When eventually withdrawn at retirement, the repaid dollars are then subject to tax again. As a result, some tax leverage is lost in the repayment of a 401(k) loan.

Repayment period

The repayment period for a 401(k) loan can be for as much as five years. If the loan proceeds are applied toward the purchase of your main residence, your 401(k) plan may allow a longer repayment period of more than five years. The payments must be made at least on a quarterly basis, and your employer may be able to simply include the payments as a payroll deduction.

If you leave your employer before repaying the full amount of a 401(k) loan, the company may treat the outstanding balance as a distribution. To avoid the penalty on an early distribution, you can effectively roll over the unpaid loan amount to an individual retirement account within 60 days of leaving the company.

The tax consequences of a 401(k) loan are usually more favorable than those of an early distribution. Once the funds are returned to the account, subsequent earnings can continue to grow on a tax-deferred basis. You can more financial planning tips from a professional near you.