Reasons to Borrow Money from your 401k

One of the more popular retirement savings vehicles is the 401(k). The main purpose of the 401(k) is retirement savings, but in certain instances you may be able to borrow money from your account. It is not recommended to withdraw from your 401(k) account unless you do not have other sources for the money you need.

Two of the ways you can withdraw from you 401(k) are loans and hardship withdrawals. You can obtain a loan from your account for 50 percent of the vested amount, up to $50,000. You will need to make monthly payments to pay back the loan plus interest. The loans normally need to be repaid within five years.  One of the main reasons people may borrow from their 401(k) plan is for a down payment on a home. You can only borrow from your 401(k) for a down payment on your primary residence, not vacation homes or investment properties. Other reasons people borrow from their accounts are for school or college tuition, vacations and other big ticket items.

If you are in dire circumstances you may qualify for a hardship withdrawal from your 401(k) plan. With a hardship withdrawal, you will pay taxes on the money you withdraw along with 10 percent penalty for early withdrawal.

Most plans prohibit you from making contributions to your account for six months after you make a hardship withdrawal. So along with lowering your account balance, you will lose the opportunity of adding to your account for six months.

Some of the reasons people may need to make a hardship withdrawal are to pay medical expenses, cover down payment or to avoid eviction and foreclosure on your primary residence, pay funeral expenses for a family member or college tuition.

Even though you can take a loan from your 401(k) account, it may be beneficial to research other sources to borrow the money than to take money from your retirement account. When borrowing from your account, along with paying interest you may also lose some of the power of compound interest on your 401k account. It may not seem like a lot, but over time a little bit of money can add up considerably with compounding interest.

Loans can make sense for purchases such as homes but keep in mind the cost of the loan when you are considering taking a loan from your 401(k) for purchases such as vacations and other items that are more wants than needs.