Should You Borrow From Your 401k?

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Real Estate

Should You Borrow From Your 401k?

So you have money in your 401K and are thinking of borrowing against your "Golden Egg" of Retirement. This is very murky waters to navigate, depending upon your true ability and diligence to repay yourself. Borrowing against your 401K should be the last resort, if at all.

If you need home improvements, the best source is traditional vehicle that is either a refinance or an equity line secured against your property. If this is not an option, look to a PACE loan for those crucial repairs - and I am talking about a roof or air conditioner. I am not talking about changing tile in the bathroom or new flooring.... that will just need to wait.

The good news is that it is relatively easy to apply for a loan up to $50,000 via the company that manages the 401K policy. Since you are borrowing from yourself, there is no qualification process. You simply sign a promissory note with an associated interest rate. You will also not be charged the 10% penalty for early withdrawal. No assets are required to secure the loan.

So why am I not a fan? There is only one reason, you lose money....

Here are some of the negatives.  You decide for yourself.

 1.  You are forfeiting your compounded interest which could mean that you are leaving hundreds, if not thousands, of dollars on the table.  

2.  The interest is not tax deductible.  The interest on a home equity loan is tax deductible.

3. If you lose or quit your job, the loan may be due in full within 60 day.  Best verify before signing.  Can you repay if for some reason you find yourself with your job?

4.  Default?  It is considered a withdrawal and you will owe a 10 percent penalty plus a HUGE tax payment.  Talk to you CPA