People tend to think it’s an easy loan because you’re borrowing your own money. But experts say there are lots of strings attached to these loans.
“If you get a 401k loan outstanding and you end up leaving your job, the loan can become due and payable,” said Roger Wohlner, a financial advisor and blogger for Chicago Financial Planner. “If you can’t pay the loan, it becomes distribution, which is taxable. And if you’re under 59, that’s a 10 percent penalty. That’s very expensive source of money.”
Your 401k is a long-term retirement savings plan that’s sponsored by your employer. Many companies allow you to take money out before retirement. When you do that, you’re taking a loan from your plan. And you will have to pay it back.
People fail to consider the impact of having their money out of the market and losing out on potential gains.
“You take the money out and your account is already low,” Wohlner said. “And the money is not in there when the market starts to go up and you miss that side too. I think people staying with the 401k should do it for the long term whatever investment strategy they are using.”
Rather than using your 401k as a piggy bank, start building your emergency funds or check out the loans at local credit unions. Make sure you exhaust all the possible options before tapping into your retirement funds.