Borrowing From Your 401k Is A Bad Idea

If you are looking for some quick cash to help you through a financially rough period, you may be thinking about dipping into your 401(k) retirement savings account. But before you do, consider why this may be a very bad idea.

    • You won’t be able to continue saving. Most 401(k) plans prohibit you from making any additional contributions until the total amount you borrowed is repaid. If you happen to have a plan that does allow it, you will probably have to put any extra money towards paying off the loan rather than increasing your savings. Remember- a 401(k) account is solely intended for your future retirement.


    • You will be missing out on possible investment growth. Whatever amount you decide to borrow from your 401(k) automatically depletes your account total. So any potential growth you might realize from your investments will be calculated using a smaller balance. Also, if you are prohibited from making further contributions until your loan is repaid, those profits (if any) are lost as well.


    • You may have to pass up better career opportunities. Most 401(k) plans require you to repay your loan immediately if you decide to change jobs. If you borrowed a significant amount, you may be forced to say “no” to new and better job offers until you are able to pay off your loan.


    • You could end up in a worse financial situation if you can’t repay what you borrow. If something happens and you are not able to repay your loan, the amount you borrowed will then be considered a withdrawal. If you are under the age of 59 ½, this means that the entire loan balance will be subject to current income taxes. Plus you will be hit with a 10% early withdrawal penalty.


    • Financial problems this serious may mean you’re living above your means. If you’re facing a financial emergency that has you even thinking about borrowing from your 401(k), you need to seriously look at your spending habits and do everything possible to change them for the better. For starters, make and stick to a bare-bones budget. Cut out unnecessary spending. Start an emergency savings account. The bottom line?


Borrowing against your future is never a good idea.