Keep the Course: The Pros and Cons of Borrowing From Your 401k!

Each Wednesday 401kBasics posts a new article in a weekly series called “Keep the Course”. This series is designed to give the average consumer information on how to keep their 401k plan on track! . Your feedback or suggestions on future articles is welcome.

More often than ever, people are tapping into their 401k plan for money. Borrowing from your 401k plan looks like an easy option for money, but educate yourself on the pros and cons of borrowing from your 401k plan prior to taking the money out!

Pros:

  • There’s no credit check, and taking a loan can be as easy as a phone call or completing a short form.
  • The interest rate is set by the plan, and typically tied to the prime rate.
  • You are paying the interest to yourself. The full principle and interest go back into your own account.
  • The loan has no impact on your credit history, so if you fail pay back the loan, your credit is not affected.

Cons:

  • The interest you pay back may be less than what you could have earned with the investments in the account.
  • Loan defaults will result in the unpaid balance being considered a taxable distribution, which may be subject to an additional 10% tax penalty if you’re under 59.5 years old.
  • There may be fees to take and maintain the loan.
  • Interest on the loan is not tax deductible, and you are taxed twice on the interest.

Just like hardship withdrawals, loans are made available if you need them, but the option should be researched and should not be abused. Keep in mind that the whole purpose of your 401k plan is to save for retirement. Your 401k plan is not a checking account!!

This site is for entertainment purposes only. 401kBasics and it’s authors are not financial advisors and no information found on this site should be construed as financial advice.

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