Should You Take A Loan from Your 401(k)?

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

In August 2011, Rex talked about reasons to take a loan from your 401(k) plan. Hopefully you also noticed the caveat at the bottom that all financial situations are different, so here are a few things to consider for why you shouldn’t take a loan from your 401(k) plan (or similar plan) even if the company you work for has decided to allow loans.

1. You may not be able to pay it back. Take a hard look at whether you anticipate being able to make the required payments. And keep in mind – if you terminate employment with that employer you are required to pay it back in full at the time of termination. So if you do not see a long-term future with the same employer, a loan may not be the way to go.
2. You may be able to get better interest rates elsewhere. While the rates for a loan from your retirement plan are supposed to be market rates, that does not mean that you are getting the best rate. Just like when you take out a car loan or a mortgage, shop around.
3. You are robbing your retirement. I know – ultimately you’re paying yourself back, but there are some proponents of this argument that are vehemently opposed to ever touching your retirement savings. Their biggest argument is “if you can’t afford it now, you’ll never be able to afford it in retirement. Find another way even if that means postponing the purchase until you have the cash saved up outside of your retirement.”

This is just a smattering of things to consider when looking at taking out a loan from your retirement plan. If you have any questions – do not hesitate to contact your tax professional who can help you evaluate your specific situation.

Katie Thomas, CPA