You need some extra cash to pay for a vacation, wedding or a new car. You might think borrowing from your 401(k) retirement plan is the simplest solution. After all, it's your money and it's convenient - no credit check or long credit application form. However, as with most financial issues, it's not as simple as it sounds. Just because you can take a loan from your 401(k) plan doesn't mean you should. Consider the following:
If you quit working or change employers, your plan and the terms of your loan may require you to repay the loan within 60 to 90 days of termination of employment.
If you don't pay back your loan within the allotted time, your outstanding loan balance will be taxed as income. You also could be hit with a 10% early withdrawal penalty, depending on your age.
The money you borrow will be repaid with money that has already been taxed. So, your loan payments generally will be taxed twice - once when you make the loan payments and again when you withdraw your money at retirement.
Interest on the loan isn't tax deductible. So, there is no tax advantage, even if you borrow to purchase your primary home.
When you take money out of your retirement plan, you have less money invested that could be earning money. Consider how much those missed earnings could grow by the time you reach retirement age.
You may not be able to contribute to your retirement plan while making loan payments, or you may be tempted to lower your contribution amount. This can reduce your long-term retirement account balance and further stall the growth of your retirement savings.
The purpose of your 401(k) plan is to fund your retirement. Most experts agree that you should only borrow from your retirement plan in extreme situations, as a last resort. Consider other financing options first before tapping into money earmarked for retirement.Recordkeeping and administrative services for the plan are provided by J.P. Morgan Retirement Plan Services.