Are you Considering a loan from your 401K ?
Virtually every time I speak to a group or have a new client come in, the question of taking a loan from a 401K or other type of employer plan comes up.
These loans sound great and are typically very easy to take advantage of. When you’re borrowing money from your plan the interest rate is usually fairly reasonable and you’re paying yourself interest right? What could be the downside?
Right off the bat, you will be losing the investment gains had you left the money in the plan.
The next consideration is that if you decide to leave your employer or become laid off and can’t pay the loan in full, it becomes a distribution – incurring income taxes and that pesky 10% penalty should you be under age 59 1Ž2.
The effect most people don’t take into consideration is that you’ll be paying taxes on the same money twice. The loan repayments taken out of your paycheck are funded with after-tax dollars. Once you take your money out in retirement, all those dollars are taxed again.
Always consider the consequences and speak to a financial advisor before taking money from a qualified plan. The backlash can potentially be much greater than anything you might be saving.