Thinking of Tapping That 401(k) for a Loan? Think Again!
I know that many of you may be feeling the heat of increased financial pressures this summer, and you might be thinking about borrowing from your 401(k) to help make ends meet. Maybe you have a tuition bill due, or another cash flow challenge. Our research shows you are not alone. In fact, since we started tracking 401(k) loans in 2005, we consistently see more people borrowing from their 401(k) during the summer than at any other time of year.*
While borrowing from your 401(k) may seem like a quick cash fix, it’s almost never a good idea. Here’s why:
- If you leave your job for any reason, you’ll need to pay back that loan ASAP – within as little as 30 days after you leave your employer or are otherwise separated from service. If you can’t pay it in full, you’ll owe taxes on the balance, and probably an additional 10% penalty if you’re under age 59½ – making a bad situation even worse.
- You might also be cheating your future self. While they’re paying back a 401(k) loan, we find that many people stop saving in their 401(k) plan. This is a huge mistake and can really de-rail your retirement savings. Plus, that money you borrowed is no longer invested for your retirement, missing the potential for market growth. A 401(k) is about the future, not the present.
- Even though you’re borrowing from yourself, you still have to pay that loan back with interest. And you have to pay it back with after-tax money, which then gets taxed again when you withdraw it at retirement.
- Finally, keep in mind that money in a 401(k) plan is safe from your creditors. Once it’s out of the plan, it’s fair game.
Borrowing from a 401(k) should always be your last resort – only when all other options have been exhausted and the loan is part of your long-term plan. A loan should never be a quick fix. That short-term gain can easily lead to long-term pain.
*Schwab Retirement Plan Services, Inc./Schwab Retirement Plan Services Company data – 2005-2011.
Schwab Retirement Plan Services, Inc., Schwab Retirement Plan Services Company, and Charles Schwab & Co., Inc. are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation. Brokerage products and services are offered by Charles Schwab & Co., Inc. (Member SIPC). Schwab Retirement Plan Services, Inc. and Schwab Retirement Plan Services Company provide recordkeeping and related services with respect to retirement plans.
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