Saturday, March 10, 2007

Borrowing against your 401k: why you should think twice

There are several reasons you may want to think twice before borrowing against your 401k:
  • If you leave your job that provides your 401k, you often are required to pay back any loans in full.  If you can't, it is treated as a withdrawl from the plan, requiring paying income tax on the amount and a 10% penalty if you are not of retirement age yet.
  • While you have the loan, you have less money in your retirement account.  This means, you are not earning interest on the loan amount and you will therefore end up with less money at retirement.
  • People at your company may be able to know that you have taken the loan out. 
  • You may shift your mindset from an investor taking an active interest in the rest of your plan's success to a debtor, so your investment might suffer.
You can -- but shouldn't -- borrow against your 401(k) plan

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