Should You Borrow from Your 401k?

Maybe your credit is not the best right now, and you can’t qualify for a loan or a credit card that doesn’t cost you an arm and a leg, but, you need some cash – perhaps to consolidate some debt, or to cover an emergency expense. If you have a 401k plan, you may be able to become a lender and borrower, but you should proceed with caution.

The first thing is to check with your employer to see if your 401k plan does allow for loans. If it does, you may borrow up to the limit allowed by the plan. You will then pay interest, to yourself (back into your account). The interest varies from plan to plan, but they are typically very low. You will need to be able to fully repay the loan within five years, or your loan will turn into a taxable withdrawal which will also be subject to penalties. Also, unless you feel pretty secure in your employment, you may want to avoid borrowing from your 401k because your loan could be callable within 60 days should you leave your employer for any reason.

Borrowing from your 401k should not be considered lightly. You will be interrupting the long term growth on your retirement funds. But, if you’re responsible enough, it can be a more preferable short term solution than borrowing at rates that are double or triple.