4 reasons why borrowing on your 401(k) is a bad idea

June 5, 2007 at 1:54 pm 1 comment

A recent conversation with a teammate prompted me to write this post about 401(k)’s. I’m sure some of you are aware of Wachovia’s recent announcement to buy out AG Edwards. Well, my teammate just happens to work for AG Edwards and, as in most buy outs, she’s left making the decision of finding a new job or sticking around a foreseeable roller coaster ride as the transitions are made.

We talked a bit about the folks that are in a similar position, but decided at some point to borrow on their 401(k)’s. I felt bad for these folks because they have to figure out a way to pay off the loan balance in full. This is the basis for the 4 reasons you shouldn’t borrow on your 401(k). For me, there’s really only one reason to touch the money in 401(k), and that is to help you avoid foreclosure. But, if it’s something you’re considering, please read the 4 reasons and then decide if it’s a good idea.

1. There are a number of 401(k) plans that prohibit you from contributing further into an account while a balance is due. Although I’m against borrowing on a 401(k), you should check into your plan if you plan on tapping into your retirement savings.

2. One of the ‘perks’ that your retirement advisors make sure to note in your meetings is that by borrowing on your 401(k), you’re basically paying yourself later. What they fail to mention is that you are pulling funds with great earning potential. It’s simply bad math and astounds me that an advisor would recommend this at all.

3. Most employees that contribute to their 401(k) plans know that if they ever quit or happen to get fired, the loan balance on the 401(k) is due in full within 30 days. What most people don’t know, or are ever told, is that if they happen to die, they are deemed to have left the company, making the loan balance due, again, in full within 30 days. That’s the last thing a widow/widower needs to be concerned about. You are also deemed to have left the company when it’s purchased by another company. That is my teammate’s situation (not hers directly, but her coworkers).

If the loan balance is not paid in full by the deadline, it will be considered an early withdrawal by which you are subject to penalties and income tax on that money. It’s just a bad idea.

4. Anybody that knows anything about personal finance, knows the Golden Rule of persona finance, pay yourself first. The moment you tap into your 401(k) prematurely, you are breaking a rule that I hold quite sacred, and others as well.

These are my top reasons for not borrowing on a 401(k) , but you may have different reasons altogether. I’d love to hear what they are. If you feel it’s a good idea to tap into retirement savings, I’d also like to know why.

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Entry filed under: Retirement.

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1 Comment Add your own

  • 1. Veda Dekorte  |  November 29, 2015 at 5:45 am

    Let’s hope its going to be a good movie

    Reply

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