Should I Borrow From My 401(K)?

These plans essentially work by investing a portion of your income into stocks, bonds, mutual funds, or other assets so your money grows over time until you retire. These accounts can grow quite large over time, and many people often wonder if they can/should borrow money from their 401(k). While you can borrow money from your 401(k), it’s important to know when to do it and what the downsides might be.

Taking a short-term loan from your 401(k) could be a wise choice depending on your specific financial situation. It’s important to note a few key issues before you consider your retirement plan as a place you borrow from.

Make sure that you have stable employment and are on good terms with your employer. While the loan you take from your retirement plan could have a term of five to 10 years, leaving your company could mean repayment in as little as 60 days. If you can't make that repayment, you could be hit with fees and taxes. Plus, depending on your plan, you might not be able to continue to make your regular, pre-tax income contributions when you take out a loan.

Often times, this short-term loan can make all the difference when purchasing a home, starting a business, or even funding education. While receiving of this money upfront may be helpful, it could be potentially hurting your retirement earnings and potential growth capabilities in the future. Your overall retirement balance is lower which decreases the amount you can earn especially over a long period of time. Even though you’ll be paying back the loan, you’re never be able to get back the time when your money could have potentially grown.

If you’ve had financial issues in the past with a bankruptcy or short sale which has damaged your credit, it could be difficult to find a loan. Borrowing from your 401(k) could make this process easier, but it’s important to do the math - how much your 401(k) money earns in interest, then look at its potential growth over time versus the long-term benefits of the loan - to make sure it makes sense for you.

While you can borrow from your 401(k), it might not always be the best option. You should look at alternative sources for loans such as Home Equity Lines of Credit or even borrowing from family. Plus, consider creating an emergency savings fund so you don’t have to tap into your retirement savings. Remember to do your research, talk with a financial planner and tax professional, and look at multiple options before making your decision.

For more information and assistance, talk with an Orange County’s Retirement and Investments Services Representative at (888) 354-6228 ext. 7599. Our financial advisors are pleased to offer no-cost, no-obligation consultations.