401k Loans - 401k Finance

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401(k) Loans - Borrowing from Your Retirement

Here's what you need to know about borrowing from your 401k.

The maximum 401k loan amount is 50% of the account balance - up to $50,000.
401k loans must be repaid within 5 years, any funds not repaid on time incur a taxable event.
Borrowing from your retirement account may result in missed investment opportunities.

You've worked hard to contribute to your retirement. Deciding to borrow from your 401k requires much contemplation. There are benefits to borrowing from your plan, but all 401k loan alternatives should be explored before making a decision.

Are you considering borrowing from your 401k due to financial instability? If so, keep in mind that your 401k is protected from lawsuits, creditors, and bankruptcy. If your financial horizon looks shaky, do everything in your power not to remove funds from the safety of your 401k.

Be sure to consider the alternatives. Home equity loans and HELOCs usually offer attractive interest rates (interest is also usually tax deductible), but you must put up your residence as collateral to take advantage. Unsecured personal loans also provide reasonable interest rates with an added benefit of not requiring collateral – once again, an advantage if your financial outlook is unstable.

If you decide to opt for a personal loan, compare the personal loan's cost of interest to the missed opportunity of withdrawing funds from your 401k retirement plan. Be sure to take into account how the funds in your 401k will compound over the next 5, 10, and 20 years. Often, the cost of interest from a short term personal loan seems quite minor when compared to the long term impact of withdrawing assets from your 401k.

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