If you are in the position of experiencing the economic crunch and trying to find additional possible revenue streams to help you get through these times, your 401(k) might be looking pretty tempting.
If you have a 401(k) retirement investment portfolio, you are allowed to borrow against the principal under certain circumstances. However, although you can borrow from your 401(k), there are many reasons why you should only do so as a last resort.
Advantages of borrowing against your 401(k)
The benefits of 401(k) loans include:
- Borrow up to $50,000 or 50 percent of your 401(k) total value (whichever is smaller)
- Loans are typically approved quickly and the usual process of securing a loan does not apply
- The interest rate is low and is paid back to your own account
- Money commonly needs to be paid back in 5 years or over 10 years if it’s for a house down payment
- 10 percent 401(k) early withdrawal penalty fees can be avoided by borrowing instead
Disadvantages of borrowing against your 401(k)
The cons of 401(k) loans include:
- Your retirement fund will not flourish as rapidly because the 401(k) plan will stop growing until your loan is paid back
- You will experience a smaller paycheck as you must repay the loan through payroll deductions
- If you lose your job, the entire amount of the loan amount must be repaid in 60 days are you will get a substantial tax bill
401(k) plans are a great benefit offered by companies. Employees will get the perk of being able to invest a portion of their pre-tax income into a retirement portfolio. Taxes will not need to be paid on that portion of the deferred income until withdrawal. Additionally, by deferring a portion of your income, you may actually succeed in lowering your income tax bracket for the year as well.
Before tapping into your 401(k) account as a loan, make sure you can handle the terms of accepting this loan. Use a retirement calculator to see if it’s a good idea financially too. If you know your job is stable and you are willing to risk a smaller paycheck and reduced investment growth, borrowing against your 401(k) may be a strategy you can employ.
