Roughly 3 in 10 people now borrow money from their 401(k) retirement plans. Generally, you can borrow half your account balance — up to $50,000 — for as long as five years. True, it’s among the cheapest loans available because the interest rate is typically the prime rate plus one percent, and interest is paid to yourself. Even so, the risks are steep; not the least of which is the loss of potential earnings that money could have been accruing on a tax-deferred basis.
The bottom line: There are reasons why raiding your 401(k) fund may make sense, but there are many more why it doesn’t.
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I worry about borrowing the money and then getting layed off because then you have to pay back the loan within a couple months.
Ted’s right–once you take out that 401k loan, if you leave your job voluntarily or involuntarily, you have to repay the loan in full or the IRS will consider any unpaid balance an early withdrawal and hit you with the tax + 10% penalty. That’s ugly, and makes for a ver costly loan.
I was going to mention getting laid-off, but Ted and Kurt beat me to it.
Ted made my point for me so here is my advice in 3 words… Don’t do it!
@Ted, Kurt, Bret, and Lance: Layoff is a big concern for a lot of people, myself included.
On top of all the other disadvantages that come with 401k loans, folks who fail to pay them off within 60 or 90 days after being laid off are on the hook for paying income taxes on the outstanding loan amount, plus early withdrawal penalties.