Unless your home is in foreclosure, we would never recommend you borrow against your 401(k) or employee sponsored retirement plan. Here are five reasons to consider if you're in need of money and are considering borrowing against your 401(k).
{AUDIO} Reasons NOT to Borrow Against Your 401(k)
Most people don’t know how it works
Many people hear they can borrow money from themselves in an advantaged interest rate scenario where they’re paying interest to themselves. What they often don’t get is that it removes the money from working for you from an investment perspective. You have to understand that you’re borrowing from your future retirement self. The longer it takes you to repay the loan, the longer that money is out of commission.
Consider the loss of your job
In many situations, if you take out a 401(k) loan and then lose your job, you’ll be required to pay back the loan in full within a specified time frame, often 60 days. If you don’t have the ability to do that, the loan will be considered an early distribution, and you’ll owe taxes and penalties on it.
Using the money to buy a depreciating asset
It is a bad transaction to pay for depreciating asset with assets from the 401(k). That shiny red sports car will seldom appreciate. Not only are you losing out on the ability for that money to grow in your 401(k), you lose value in those assets when you purchase a depreciating "thing".
Using the money to pay college tuition
There are a variety of other ways to borrow for school that won’t directly impact your retirement funds. Best-case scenario you have planned and saved for kids' college, but if you or your student must use borrow to pay for school, students would be a better option - we consider this a better idea than borrowing against your 401(k).
Bailing out my children or an emergency?
Many people feel that their children are in desperate situations and absolutely need money. A parent might be better-off just turning the child down and letting them learn something. This is just another reason we're fans of budgeting, saving and planning for emergencies - whether for you or your children.
If you have questions or concerns regarding your 401(k), please, give me a call at 320.222.4236 or email [email protected]