Selling Structured Settlement Payments vs. Borrowing from Your 401k

Basically a structured settlement is a very powerful and useful financial tool that was created by congress to be used exclusively by injured individuals. Whenever you win a personal injury lawsuit you basically get the option to collect all your payment in one lump sum or via a structured settlement. This structured settlement allows for the injured individual to receive payments over a set period of time based on those people’s financial needs. Some of the advantages this financial vehicle includes are:

  • Set payments from any annuities that were purchased to fund the structured settlement are guaranteed
  • 100% exclusion from all taxes in regards to dividend, income and capital gains taxes for the life of the individual
  • Personalized planning with skilled consultants that allow for all immediate and future financial priorities to be met
  • Removes all risk of losing funds to poor market investments and or poor money management
  • Allows for full eligibility for all federal and private health care benefits and plans

This was one of the crucial reasons why Congress created structured settlements in the first place. Most folks who win a personal injury lawsuit and choose to take a lump sum payment were simply not prepared to spend the money wisely. As a result they would often time default on their future debt obligations.

 Large Range of Qualified Cases

Structured settlements can be applied to vast range of injury cases and is not tied to any set amount of money per any case in question. As a matter of fact based on a recent poll by Ringler Associates, more than 60% of structured settlements were for settlements that were less than $55,000. So basically, structured settlements can be used for any cases involving workers compensation, medical malpractice or personal injury and covers:

  • Temporary and/or permanent disabilities
  • All needs that are considered long term
  • Under-aged children or individuals considered mentally incompetent
  • Any injuries considered severe in nature and that result in serious brain damage or leads to a shortened life expectancy
  • Spouse who are survivors of a death case and their dependents

Over the years structured settlements have been used to cover even more wide reaching cases including property loss, divorce, wrongful termination, discrimination, sexual harassment and more.

Payments That Fit Your Future Obligations and Needs

Structured settlements by their nature allow for your funds to compound and grow because they are invested in annuities that earn interest and are purchased from only the very best rated insurance companies. As money is earned it is then disbursed to the individual based on the terms set forth in the agreement. This can include monthly, annually and all periods in between. Even future larger lump sums payments can be included in the agreement. Or the individual can choose any combination of all possible payment terms that will then be honored.

The smartest plan that most structured settlements winners follow is to make sure that all future important obligations are covered. So for example all mortgage payments, tuition payments, medical expenses and retirement income would be paid first. After these important obligations any other secondary needs would be covered for example paying for a new vehicle, vacations or home repair etc.

Obviously everyone’s situation will be unique and as such it’s important that if you are the considering going the structured settlement route you should seek out competent financial professionals to help guide you in coming up with the perfect plan for your needs.

 So Should You Borrow From Your 401k Plan Or Cash Out Your Structured Settlements?

This is a critical question for a lot of individuals who have structured settlement payments and are considering whether they should borrow from their 401(k) plan or simply sell off some or all of their structured settlement. So let’s dig into this to understand the pros and cons.

Borrowing from your 401k Plan

What are the Positives?

  • It’s quicker.  Most times you can get access to needed cash inside of 24 hours if your plan administrator allows wire transfers.
  • No need to worry about credit checks.
  • It’s pretty easy.  While plans vary, there’s a great chance you will be able to the needed cash by filling out a simple form or making one quick phone call.
  • Big savings on Fees.  Borrowing from your 401k plan comes with no added fees. The only real cost to you will be the interest you will need to repay to yourself.
  •  Repayment Flexibility – most 401k plans will allow you a 5 year repayment schedule that is amortized; however you still have the right to pay off the loan faster with no prepayment penalties.

What are the Negatives?

  • Obviously you must have a 401k plan to begin with.  So if you don’t have a 401k plan at your job then sorry you’re out of luck.
  • Your specific 401k plan may not have the option for you to borrow funds from it.  So you will need to double check this with your plan administrator.
  • You will lose growth in your 401k plan.  Any money borrowed from your 401k plan is money you won’t be earning any interest on. So this will mean slower growth for your 401k future income.
  • If you happen to be younger than 59 ½ and you don’t repay the loan in full, the government will consider this a form of early distribution and you will be responsible for both state and federal income taxes. Also you will incur a 10% penalty on the loan amount.
  • The 401k loan isn’t tax deductible.  Because it’s viewed as consumer loan there is no tax advantage.

The Option of Selling Your Structured Settlement Payments

If you need to borrow smaller amounts of cash, let’s say $10,000 and below then borrowing from your 401k might be the best option.  However if you are in need of much larger sums of cash then you might be better off selling off portions of your structured settlement payments which has some really powerful benefits that include:

  • Selling structured settlement payments does not create any debts you will then have to repay.
  • Selling portions of your structured settlement payments does not come with the potential of being hit with 10% penalty like you get with your 401k early withdrawal.
  • Selling portions of your structured settlement payments does not have any effect on the future value of earning power of your remaining payments.  Never forget that when you borrow from your 401k, you reduce the earning power of the 401k plan by the amount of money borrowed. This then has a negative effect on your future interest, dividends and capital gains.

Now while these benefits do seem powerful they do come with a cost. In order for you to gain the right to sell some of your structured settlement payments you will have to get court approval. This means it will take much longer to get the approval to actually sell those payments. This obviously is a much longer process than simply getting a 401k loan. But in the end for much larger amount of needed cash this is still a far better option for those with structured settlement payments.