Thinking of Borrowing From Your 401(k)? Know Your Facts Before You Act

Even with the best plans in place, the unexpected can still alter the best laid financial plans. And when this happens, it can be extremely distressing. If you are in a position where you need money fast, it might be tempting to dip into your retirement savings. However, there is good reason to think twice about taking money from your own retirement. Although, what you may not realize is that you can borrow from your 401(k). And when done right, borrowing from your 401(k) can help you get financial relief from a tough situation though it comes with some consequences. So, be sure to know what you are doing before you act.

Be sure to learn the 7 Deadly Retirement Saving Sins before you continue.

401(k) Loan Basics

Before you do anything without knowing your facts, it is essential that you know exactly what taking money from your 401(k) means. Borrowing from your 401(k) isn’t like taking out a traditional loan. There is no lender nor an evaluation of your credit history. This is due to the fact that your 401(k) is your money, though not a liquid asset. In essence, a 401(k) loan is your ability to access up to $50,000 of your retirement savings tax-free. Like most loans, you must work to repay the money you choose to borrow. Though it is important to know your specific 401(k) features, benefits, and consequences. 

When a 401(k) Loan is a Good Idea

Simply because you have the ability to borrow from your retirement finances doesn’t mean you should without giving it some serious thought. Think about the risks of borrowing against your own retirement and consider how quickly you can pay the loan back. So, how do you know when a 401(k) loan is a good idea?

Well, if you find yourself needing a lump sum of money for urgent short-term needs, your 401(k) might be a good option. An example of this might be losing your job and needing liquid assets as soon as possible. For this type of situation, borrowing from your 401(k) might be a good option. But be sure you don’t forget about repayment. In most cases, you will be responsible for paying the loan back within five years.

Benefits of Borrowing from a 401(k)

So, you need the money but are still hesitant about dipping into your retirement fund. Well, there are a few benefits you should know about. A few benefits are:

• No required credit checks
• Borrowing from a 401(k) is quick
• Flexible repayment plans

As far as repayment is concerned, there are a few options to how you can choose to do it. Often, your 401(k) plan allows you to make payroll deductions to pay back your loan quickly with no repayment penalties. When compared to a consumer loan, you can avoid paying back high-interest levels. Though a 401(k) repayment plan comes with interest, this interest is paid to your account. This often helps increase your retirement savings after the fact. 

Consequences of Borrowing from a 401(k)

Though borrowing from your 401(k) comes with certain benefits, it is not consequence-free. There are a few things you should remember before taking out a 401(k) loan.

• You must pay it back
• You won’t make any ROI on the money you borrowed
• Should you leave your employer, the borrowed money is taxable
• If your financial situation gets worse while trying to pay back your loan, you can be in big trouble

Essentially, your 401(k) is a cushion and when you borrow against it you lose it. Be sure you don’t act without carefully thinking this through first.

Planning your retirement is a tricky business, so make sure you learn the 6 Money Planning Tips for Your Senior Living with this FREE eBook!