Is it good to borrow against your 401k? I have about $16,000 but need to borrow $3,000.
2007-09-13 05:46:49 · 7 answers · asked by Shonny 1 in Business & Finance ➔ Personal Finance
It's best to avoid it if you can. The two reasons that it's a bad idea:
1) You haven't paid taxes on the money in your 401(k), but if you borrow some and pay it back, you'll be paying it back with money you have paid taxes on. This means that when you withdraw it in retirement (which is a taxable event), you'll be paying taxes on it again.
2) While the money is out of your 401(k), it will miss any stock market gains it would have otherwise had.
2007-09-13 05:54:40 · answer #1 · answered by Kathryn 6 · 3⤊ 1⤋
Generally speaking, no. Because of its tax deferred compounding interest nature, and that it is used for retirement, you should avoid borrowing against it at all costs.
First, I would ask yourself how badly you need the money. In a dire emergency (you can find information on what constitutes a qualified emergency on your plan administrator website), you can withdraw the money without penalty. This option is preferable to borrowing against it. If your reason doesn't qualify and is not dire, don't buy or use the $3k, or look elsewhere first. Getting a cash advance with a low interest promotional offer might actually be preferable.
If you want a comfortable retirement, it is best to a) fund your 401k as much as possible and b) don't mess with it by taking money out.
2007-09-13 13:11:42 · answer #2 · answered by docjulius 2 · 1⤊ 0⤋
It is a good way to borrow money and not get yourself further into debt. Usually what happens is you pay back the money thru after tax payroll deductions. Usually you pay yourself back with interest...so you are paying back more than what your borrowed, but you get to keep the extra (unlike with a bank loan where they keep the interest).
Only do this if you are going to be staying at your job until the loan is paid back. If you leave before the loan is paid back they will deduct the amount you owe from your 401k (not that big of a deal), but also, the money you borrowed is now taxable income and you will pay the penalties on it (as if you had just withdrawn the money instead of taking out the loan) and your taxable income for your income taxes will go up as well.
2007-09-13 12:56:50 · answer #3 · answered by Anonymous · 2⤊ 0⤋
Katheryn and Jay are way off base in their answers. Sch is right on the money! I speak from experience. I borrowed (in essence made a loan to myself...so to speak) from my 401K when my husband lost his job. I borrowed enough to make the mortgage payment for 6 months so that my husband could have time to find a job that paid the same or better than the one he lost. I have NOT paid any taxes or penalties on this money because I did take it out as a loan (signed loan docs) and I am paying it back through payroll deductions along with interest into my 401K. I was able to choose the amount of my payment which then in turn determined the term of the loan. The interest I am paying is going into my 401K account and not into someone else's pocket. Therefore, it's really costing me nothing unless I quit my job or get laidoff...then and only then, will I have to pay taxes on the the principal balance that is left on that loan along with the penalties involved.
As far as I am concerned, it's not a bad choice especially when faced with a serious situation we were faced with over a year ago.
2007-09-13 13:20:16 · answer #4 · answered by Anonymous · 1⤊ 2⤋
You can but it is a really bad idea. the reason is simple. If you need $3,000 you really need to borrow $5,000 because you will need to pay taxes on the money you withdraw. You will also need to pay a penalty. The whole idea of a 401k is that you accumulate interest on pre tax dollars. This is a huge benefit. You will lose wealth today as well as tomorrow since you will not have the balance to accumulate interest on.
2007-09-13 13:06:12 · answer #5 · answered by Jay P 7 · 1⤊ 0⤋
Don't borrow against your 401K unless it is your only option.
Borrow money from a friend family member, credit card cash advance...anything other than payday loans before borrowing against your 401K.
Since 401K contributions are taxed when you withdraw them and you must pay back the loan with after tax dollars, you are essentailly allowing your 401K contributions to be double taxed.
Really bad idea in my opinion, check out other venues, prosper.com etc before borrowing against your 401K.
2007-09-13 14:16:06 · answer #6 · answered by Blicka 4 · 1⤊ 0⤋
No- you'll have to pay taxes on it too when you borrow against it, so that $3k could turn into $4k, with an extra grand just fro taxes.
2007-09-13 13:18:06 · answer #7 · answered by magy 6 · 1⤊ 0⤋