Reasons to Avoid 401(k) Loans
Many 401(k) plans offer the option to take a loan against a portion of your 401(k) balance. This might seem like an easy source of funds to tap for various reasons, but with exception of a dire emergency you should think twice about borrowing from your 401(k) plan.
Leaving your job can trigger the requirement for an immediate repayment of the loan. If you can’t make this repayment you will trigger taxable distribution for that portion of your balance that also comes with a penalty if you are under 59 ½.
- If the stock market increases, you lose out on potential gains
- There are costs involved with these loans
- The interest on the loan is not tax deductible.
- There is no flexibility in the repayment terms if you run into financial difficulties.
- You will likely have less saved at retirement.
These loans are even more dangerous for those of you who:
- Are near retirement. You may find yourself unable to pay the money back prior to retirement resulting in both an extra tax liability and a lower retirement nest egg.
- Are planning to change jobs in the near future.
- Feel that your job security is in question.
If you have questions about the financial impact of taking a 401(k) loan, contact our office to schedule a meeting so we can help you take a look at your options.