Borrowing from your 401k is not a good idea, and here's why. When you borrow from your 401k, you are taking a loan. Yes, that's right. You are borrowing money from yourself.
Usually, you have five years to pay the money back with interest. If you end up leaving your job before the loan is paid back, you usually have to pay it back within 60 days of leaving, or it's considered a distribution and taxed as income. Not only are you paying interest on your own money, but you're doing it with after-tax dollars. You will have to pay taxes on those same funds again when you withdrawal the money in retirement. This is known as double taxation. You’ re also missing out on any compound growth that your investment would have earned if you didn't take the loan. While you’re paying back the loan, you probably won’t be contributing to the 401(k) so you miss out on the company match.
Those considering a 401(k) loan should compare the rates they can get on other types of loans, such as a home equity line of credit. For people with solid credit, that will likely be a better option than borrowing from the 401(k).
For more information call 855-22money or go to the website yoursafemoneyshow.com.
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