Most financial experts believe taking money out of your 401(k) should be thought of as a last resort effort when you are desperate for cash.
One reason why taking cash out of your 401(k) is frowned upon is that many people don’t have enough saved for retirement in the first place, so when they take that money out of the account then the money is no longer devoted to helping them meet their retirement needs – and the money is no longer growing, compounded and tax-deferred.
Of course, having an adequate emergency fund in reserve is a good way to avoid drastic moves – but if you’re out of cash and you have no options to get money that you need , then a retirement account loan might be a logical move.
Home Equity Loan or Other Borrowing?
First, don’t touch your 401(k) until you have at least considered alternatives such as a home equity line of credit or borrowing from a family member. About the only situation desperate enough to justify a retirement account loan is one where you have no money to meet basic needs such as food and electricity. Anything else, such as paying credit card bills, can be negotiated.
To Get a Better Interest Rate
A 401(k) loan could be a useful option for people who have problems getting credit at affordable rates. If you have a very low credit score, instead of getting a rate two, three or four percentage points higher or not getting credit at all, a 401(k) loan could be a viable option.
Just remember that the interest you save by choosing a 401(k) loan over a bank loan still may not be enough to make up for your loss of earnings from taking the money out of your retirement account .
A Down Payment for a House or a New Business
If you’re thinking about borrowing from your retirement account , make sure that you’re happy with your employer, the boss is happy with you and there are no layoffs imminent. If you leave your job, you’ll generally be required to repay the loan balance immediately – usually within 60 days. Plus, the money you took out now gets flagged as an early withdrawal , so you’ll incur the 10 percent penalty and owe income taxes on the amount.
Also take into account your projected income over the course of the normal five-year loan repayment period. Payments on 401(k) loans usually are taken directly out of your paycheck – on an after-tax basis – so you’ll want to be sure you can live without that money from your take-home pay.
If you want to take out a 401(k) loan to raise capital, be confident of your job security.
Under certain circumstances, borrowing from a 401(k) to purchase a home, finance a business or advance your education might be worth considering. The repayment period is often extended for home-buyers.
A 401(k) loan might also be useful for acquiring educational credentials needed to keep your job or advance your career. Just be sure that the piece of paper you are risking your retirement for is worth it.
You’ve really got to be careful about where you invest your retirement dollars. Understand what the value of that education certificate is in the marketplace before you make that investment.
Related Information in Prosperity News
- Debt: Using Your Home to Borrow Money to Get Cash
- Should You Borrow From Your 401(k) to Pay Off Your Debt?
- Refinancing Home to Fix Credit Card Debt Problem
- Debt: Borrow Money to Build Your Credit History
- How to Get Cash Out of Your 401(k) or IRA Without Paying a Penalty
- No Money for an Emergency – Study Finds Most Families Have No Cash for a Rainy Day
- Financial Mistakes Young Families Can Make
- College Graduates: Tips to Establish Credit and Build a Good Credit Score and History
