Should I Borrow from my 401(k) Plan?

When times get tough, the question of whether or not it is wise to borrow from your 401(k) plan may come up.

The short answer, unless you have absolutely no other option in the world, our advice would be to absolutely not to consider this as a viable option.

The reasons are pretty clear:

• Repayment must be made in full, with interest, within five years. If times are bad enough to consider utilizing the value of your portfolio, chances are that it may be difficult to rebound smoothly within that period of time.
• If the loan isn’t repaid in five years then you’ll have to pay income tax on the outstanding balance, plus an early withdrawal penalty if you’re under age 59 and a half.
• While there isn’t a fee to borrow from your 401(k), it will cost more to repay it, as this will have to go in post tax.
• If times get even harder and you lose your job, you’ll need to repay within a set period of time – usually 90 days. Not a good place to be in when you are unemployed and have no chance of building wealth.
• Additionally, you’ll have smaller portfolio to build on, making your nest egg for retirement that must less to rely on.

Given the relative lack of liquidity for retirement assets, having a chunk of change in the bank for emergencies is really essential. If you’ve got extra money to throw at retirement, that is great, but only if you have enough to float you without dipping in to borrow from your retirement funds.

Good luck to those who are facing hard times in this economy. Keep your head up and try to stay away from borrowing from your 401(k).

Best wishes,

Miel