Your 401(k) account will finance your retirement. You may wish to access to those funds now, though. Learn the pros and cons of borrowing from your 401(k) as you decide if this financial move is smart or not.
401(K) Borrowing Pros
As long as you remain with your current employer, you can borrow from your 401(k). Typically, you can withdraw the lesser of $50,000 or half of your vested amount. Here are the pros to taking out a 401(k) loan.
- Use the money for almost any purpose, including to repay debt, pay off medical debt, send a child to college, buy a car or purchase a house
- Borrow regardless of your credit score
- No need to complete a loan application
- Repay the loan with automatic paycheck deductions
- Take up to five years to repay the loan with no penalty for early repayment
401(K) Borrowing Cons
While the 401(k) money is yours to use, taking money from the account today reduces the interest your account earns and ultimately affects the amount of money that’s available for you during your retirement. Consider the cons of borrowing from your 401(k) before you take out this loan.
- Pay double taxes since you pay interest on the loan with after-tax money and will owe taxes on the money when you withdraw it during retirement
- You’ll owe a 10 percent penalty tax if the full amount is not repaid before you leave your current employer and you are younger than 59.5 years old or if you do not meet the loan repayment agreement
- The amount you borrow is no longer protected from creditors or bankruptcy
- High interest rate
How to Borrow From Your 401(k)
Before you take a 401(k) loan, determine the purpose for the loan and if you can successfully repay it. It could hurt you if your finances aren’t in order.
Next, talk to your Human Resources manager. Some companies and plans do not allow 401(k) loans and others will allow you to take money out of your 401(k) for hardship purposes such as repaying medical expenses or keeping your house out of foreclosure. If you can take this loan, complete the necessary paperwork, which may include your HR manager’s signature. You’ll also need to make arrangements to repay the funds. In many cases, you receive the loan money in a few weeks.
Know the pros and cons of borrowing from your 401(k) as you can make an informed decision. It may be a good move for you. For more details, talk to your Human Resources manager or financial advisor.