SHOULD I BORROW FROM MY 401(K)?
When you're in need of money, borrowing from a retirement account like a 401(k) might seem like a good idea, especially if your retirement years are a long way away.
While consolidating debt or paying off debt entirely is a positive move, borrowing money from your retirement accounts, especially if you have current issues with credit, should be a last resort. Here are just a few of the reasons why:
- When you take money out of your 401(k), that money cannot earn interest and you lose out on the opportunity to earn more money. This loss is sometimes called the "opportunity cost".
- There is no tax benefit. When you pay back a 401(k) loan, the money you are using to pay it back has already been taxed (through income taxes). You'll be taxed again when you cash in the 401(k) for retirement.
- If you don't repay the loan within 5 years (or between 10 and 30 years if the money was used to buy a home) you will owe federal and state income taxes plus a 10% penalty if you are under the age of 59 ½.
- If you quit or lose your job before paying back the money, you only have one or two months to pay it back.
- Unlike home equity loans, you cannot take a tax deduction for the interest you pay on a 401(k) loan.
Instead of borrowing against your future, you may want to consider talking to a credit counselor. If you own a home, a home equity loan or line of credit is a potential option. Don't borrow against your future if you can avoid it – doing so may end up compromising your quality of life when you're older.