Is Borrowing Money From Your 401(k) a Good Idea?

Many people work hard throughout their life building up a 401(k) account and at many times in life it can be very tempting to borrow against it, particularly when you have built your balance up to a very high amount and there are temptations of paying off all your debt, purchasing a new home, or needing money for college tuition. Before you convince yourself on taking out loans from your 401(k) plan, there are some important factors that you must be aware of to avoid risking your funds.

Taking out loans on your 401(k) might appear to be risk-free but there are costs that may not be obvious to you. All money borrowed from 401(k) loans will lose all tax- favored investment returns. The borrower is charged additional interest for 401(k) loans.

The interest you pay on 401(k) loans are not tax deductible. There is often a fee associated with 401(k) loans. It is important to factor in these fees to understand if the loan is still cost effective for you.

If you quit your job or terminated before the 401(k) loan is paid off, you will be required to pay the remaining balance of the loan back immediately. If you do not have the funds to take care of the balance of the loan, the IRS will start implicating taxes and penalties that can add up to around 30% of the money you borrow.

401(k) loans can be an attractive route to take in many situations but all of the costs and fees that are associated with the loan can quickly make a good thing look bad.

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