Is it a good deal to borrow money from your 401K retirement plan?

Answer 1

if you need the money to get an operation to save your life, yes.

otherwise, bad idea.

Answer 2

I would generally vote "no".

While it is a lower cost way to borrow many times, it can have a number of negative effects.

For one, those funds generally stop growing while the loan is outstanding. With a cooperative stock market, they should double in approximately 7 years, which is the term of many 401k loans.

Even worse though, is what happens if you leave the company.

If you leave you company while the loan balance is outstanding, and can't repay it on the spot, it is considered an non-exempt distribution.

You will owe Federal and state income taxes on it, in addition to the 10% penalty if you are under 59 1/2, which can easily amount to 40% of the loan balance.

Good luck!

Ken Clark
Certified Financial Planner

Answer 3

Generally a last resort as you have the tax liability and possible penalties. What is crazy is that they charge you interest on your own money!
If you need to borrow money - do it elsewhere, and reduce your 401k contribution.

I highly recommend a ROTH IRA as you can remove the principal without penalty or tax consequence while the interest continues to grown tax deferred. However, you have the same consequence as a 401k if you take out the interest.

Answer 4

No, it's an awful idea. You should only borrow against a 401K if you are about to go bankrupt. Otherwise, it's just a huge waste of money. You will lose out on your retirement funds, AND end up paying tax penalties and fines. Not a good idea.

Answer 5

you probaby must be contributing approximately $500 a month to it. in case you're making contributions $500 a month for next 35 years at 8% return you're becoming $a million.a million million. $a million million isn't adequate to retire on. in case you reside to be ninety years previous this is not any longer adequate. yet you besides mght must be waiting to beat 8% if making an investment for 35 years. consistently max out 401k. consistently make the main of business organization adventure in case you have one.

Answer 6

I would almost always say NO.

Many people don't realize how much borrowing from a 401k plan can hurt you, not only in the long-term but even in the short-term.

Long-term consequences have already been mentioned. To sum up, you are taking money out of a plan and limiting the potential for possible investment gains, which in a bull (rising) market can be quite substantial. 401k plans are beneficial because of the tax-deferred growth opportunity...do not waste that.

Hardly ever mentioned are the short-term consequences. The money that comes out of your paycheck to pay back the loan gets deducted AFTER taxes are already withheld (if you don't believe me, check your paystub if you have a 401k loan). That means you are currently being TAXED on the loan payments. Yes, you are paying the interest back to yourself, but when it gets posted back into the account, it gets denoted as a pre-tax source again. When you then withdraw it years later, you are taxed on the interest AGAIN (double taxation). Keep in mind, you are NOT double-taxed on the principle because you just took money out of your plan and are simply paying it back to the account. Regardless of where the repayment of the principle comes from, it is a zero-sum gain.

To put this scenario into layman terms and give a simple example: Say you borrow $5000 for a few years and the interest rate on the loan is 10%. You gross $1250 per paycheck, and after taxes you net out $1000 per paycheck coming home to you (that would mean you're in a 20% tax bracket [forget marginal tax brackets for now]). Again for simplicity's sake, say you end up paying $500 of interest back to yourself (10% of $5000 ignoring amortization), but 20% of that is CURRENTLY going to go to the IRS to pay for federal taxes directly from your paycheck...that would be $100 of taxes. That $500 of interest gets put back into the 401k account as a pre-tax source and remains tax-deferred until later on when you withdraw it and get taxed on it AGAIN. The principle of $5000 left the account and the money was eventually put back into the account. It did in fact come from your paycheck, but the principle does NOT end up being double-taxed. It's just like if you borrowed $5000 and paid it back at once, the two transactions cancel each other out. It's the INTEREST that is causing you a taxable expense.

So, $100 might not seem like a lot of money to give up, but that's only using a $5000 loan example. Some people take out the maximum $50000 loan and are in much higher income brackets (also keep in mind state taxes and all those other taxes like FICA, Medicare, etc. that you end up paying TWICE). With correct calculation of interest using amortization schedules, depending on the amount of time the loan is outstanding, the interest itself ends up being much more than just principal x interest rate. The double taxation can end up costing you THOUSANDS of dollars. It's usually cheaper to get a home equity loan since you can write off the interest expense.

Some other nitpicky points:

-Many 401k plans have loan initiation fees (usually around $50) and/or loan maintenance fees (which can be an additional $50 PER YEAR). A five year loan could end up costing $300 in fees alone regardless of the amount you borrow.
-As mentioned before, if you leave employment and the loan is still outstanding, you usually have a limited time to pay it back or it gets reclassified (goes into default) and added to your gross income for the year. Most people are not able to payoff a large loan in full within a couple months. You then end up getting taxed right away at your current income bracket (could even be a higher bracket because the amount is added to your gross income for the year) and possibly penalized 10% if you're still under 59.5 years of age.

I hope this brief 'article' helps everyone out a bit and spreads the word about the true consequences of borrowing against your 401k. Please be smart and put money into a 401k plan that you TRULY BELIEVE you will never have to touch until retirement. Also, always read through a summary plan description BEFORE enrolling into a 401k plan. You should be able to call up the trustee/record keeper (financial institution) who handles the plan or even your local human resource office and get an enrollment kit or a brief brochure about the plan rules.

-Sean

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