Your 401(k) plan may allow you to borrow a portion of your account balance but is it a good idea?
You may winding up owing more than you borrowed—almost 50% more!
Why it may be tempting to borrow from your 401(k) account:
• There’s no credit check.
• There may be a lower interest rate compared to other loans.
Why you might want to resist the temptation to borrow.
First, your retirement money should be “working for you,” that is, earning investment returns.
Secondly, if you leave your job your entire loan balance may be due when you can’t afford to pay it back—and the tax penalties could cost you a bundle.
If you leave your job, it is very likely your employer may ask you to repay the entire loan balance. If you can’t repay it, you most likely will owe Uncle Sam income tax and penalty tax on this money. Below is an example of how big the tax “bite” could be on a $20,000 loan for someone in the 25% income tax bracket, under age 59 ½ and living in a state with a 5% income tax—compared to how much the amount might have earned if it stayed invested.