Borrowing Against 401k- Should You Do It?
Borrowing against a 401k plan can be a tempting option for many people. The opportunity to get an easy loan that you are essentially paying back yourself can be very enticing to those who are in desperate need for extra funds. The current rule is that you can borrow up to $50,000 or 50% of your 401k whichever is smaller. This can be quite a bit of money, but because no decision should be made without looking at all the facts, we will take a look at the different pros and cons of borrowing against your 401k.
Pros to Borrowing
1. You do not have to qualify for a loan because it is your money. This is nice because you can avoid extra loan qualification costs and don’t have to wait several weeks or months for loan approval.
2. The interest rates tend to be low and your interest payments go back into your account.
3. You can have 5 to 10 years to pay this loan back.
4. You avoid early withdrawal penalties and income taxes that would trigger if you just took the money out of the plan.
Cons to Borrowing
1. Borrowing will slow down the growth of your plan as the money borrowed does not grow until you pay it back.
2. The loan is repayed through a payroll deduction which means it will cut down your take home pay.
3. If you leave your job by choice or not, you will have to pay it all back in 60 days or face a tax consequence.
As you can see, the biggest concerns are that you may not be able to make as much money by borrowing or you may create early penalty tax consequences if you trigger an event requiring full payment like leaving your job. For this reason, most financial advisors advise against borrowing against 401k plan. Although this idea can be helpful for people who are making a one time payment as a last resort, it should be avoided when possible as it leaves too many variables too chance.
For more information on Borrowing against 401k, try visiting http://www.accountretirement.net – it is an information website offering tips and investment advice concerning all types of retirement plans and options.
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