Drawbacks of getting a Loan from a 401k Plan

Are you a little tight on cash right now, but the bills need to be paid by next week? Well, if you are thinking of ways to get cash now, you could always borrow from a 401(K) that has accumulated cash that has been paid into it throughout the years. However, before you go borrowing from that fund, remember that there are some drawbacks to borrowing from your 401(K).

According to themoneyalert, the biggest drawback about borrowing from a 401(K) is that you cannot continue to contribute to your 401(K) until the loan has been paid back. So, instead of paying into your retirement fund, you are essentially paying back a loan. It take up to five years to repay this loan, and that can be some serious money a borrower misses out on contributing.

Did you know that your 401(K) loans are repaid with after-tax dollars? Lendingtree also goes on to say that the money that you fail to repay can be subject to state and federal taxes and a ten percent penalty levied by the IRS. This can make your loan more costly than it needs to be if the loan isn’t paid off.

Also according to Lendingtree, your interest is not tax deductible, and you might have to pay off the entire balance if you are suddenly unemployed. This makes borrowing from your 401(K) a risky proposition in this job market. Unless you are able to guarantee that you won’t lose your job, or can make payments in a timely fashion, you might be better off not taking money out of a 401(K).

There is another direct disadvantage of borrowing from a 401(K). As gobankingrates.com mentions, all 401(K) loans are paid back through payroll deductions. This means that you will not have as much money for take home pay as you would otherwise. If you are living paycheck to paycheck, this can put even more of a strain on your finances. Just another aspect of a 401(K) loan that should be thought of before taking the loan.

When you borrow from a 401(K) you are losing out in a few ways. The money comes out of your paycheck, has no real tax advantages and you cannot contribute to your retirement through 401(K) contributions until the loan is repaid. As easy as it might be to borrow from a 401(K) it would be worth thinking over all the potential drawbacks.