The Pros And Cons
On the surface, borrowing from your retirement fund may seem like a very good idea. Since you are borrowing the money from yourself, there is no credit check needed and often you can access the money quickly and easily. In addition, you make your payments, along with interest (usually one or two percent over prime), back into your own account, rather than giving the money to a bank or other institution. This can be an appealing concept.
On the flip side, though, some plans require you to stop making contributions until your loan is paid back. And if you normally get an employer match, this means you are missing out on this benefit as well. Further, when you withdraw your money while the stock market is down, you may sell your stock at a loss. Or, if you sell when it’s up, you may miss out on further gains and may also have to spend more to buy the stock back later, so there are missed growth opportunities that you must factor into the equation, particularly when you realize that the larger your balance, the faster the money grows for your future, and vice versa.
Other Things To Consider
If you borrow against your retirement fund, you must be sure you will be able to make the payments, which may be due weekly, monthly or quarterly. You should also understand that if you leave your employer under any circumstances, you may be required to repay the balance of the loan immediately (or within 30 to 90 days in some cases). If you are unable to repay the full loan in time, you will be responsible for income tax on the balance due, and if you are under age 59½, you will also be subject to a penalty of 10 percent of the amount for withdrawing early.
When It Makes Sense
If you are deciding whether it makes sense for you to take out a loan from your 401(k), many financial experts say that it depends on what the money will be used for. For instance, you would not want to use your retirement fund to pay for a vacation or to buy a new car. But if you have unexpected medical bills or need it to help pay for an essential repair on your home, if you have nowhere else to turn for help, this may be a feasible last resort, especially if you will be able to repay the loan within the specified time period.
In addition, some people find it feasible to take out a retirement loan to buy a home. You can often stretch out the repayment of a loan for a home for as long as 15 years.
