In these times more than any, many people are considering borrowing from 401k for one reason or another. But is it really a good idea? In this article I have examined a situation in which it would be a valid option to borrow against 401k, and also reviewed the main reasons to not borrow against your 401k.
A Valid Reason to Borrow Against Your 401k:
Your vehicle is making strange sounds and is in desperate need of repair. This vehicle is of crucial importance, as you use it every day for work and other purposes. It will cost you about $2,000 to get it repaired. You could use your credit card to get it done, but then you’d have to pay about 20 percent in interest rates. You have no other access to funds. So, in this case it might well be appropriate to borrow from your 401k.
5 Reasons Not to Borrow Against 401k:
1) You might not have it for a real emergency. If you take that money now and are unable to pay it back, then if you hit a rough spot, you might not have it to fall back on. It should always be a back-up option for when you really need it.
2) It’s for your retirement. The reason behind the 401k’s existence is to have money later, when you retire. If you borrow from it now, you might not have enough left for when it’s actually intended to be used.
3) If you borrow, it won’t grow. If you take money out of the 401k account, this is one amount less that will see investment growth. If you want it to properly earn for your retirement, you should probably leave it alone. If you take money out and put it back in, it almost defeats the purpose of the whole thing.
4) You may be hit with contribution limits and fees. There are certain company plans, which will penalize you for borrowing from 401k in that they will prevent you from putting money back in once you borrow from it. You may also be hit with fees for taking out loans, and these are things you really don’t want to deal with.
5) The 401k is connected to your job. This is an important reason not to take out a 401k loan. If, for any reason, you have to leave your job, it is required by most companies that you pay the loan back much faster, if not immediately. It will not be very pleasant for you to be stuck with a loan and be out of a job at the same time.
For more information on the 401k, go to:
http://www.401k.org/
http://en.wikipedia.org/wiki/401%28k%29
3) If you borrow, it won’t grow. If you take money out of the 401k account, this is one amount less that will see investment growth. If you want it to properly earn for your retirement, you should probably leave it alone. If you take money out and put it back in, it almost defeats the purpose of the whole thing.
4) You may be hit with contribution limits and fees. There are certain company plans, which will penalize you for borrowing from 401k in that they will prevent you from putting money back in once you borrow from it. You may also be hit with fees for taking out loans, and these are things you really don’t want to deal with.
5) The 401k is connected to your job. This is an important reason not to take out a 401k loan. If, for any reason, you have to leave your job, it is required by most companies that you pay the loan back much faster, if not immediately. It will not be very pleasant for you to be stuck with a loan and be out of a job at the same time.
For more information on the 401k, go to:
http://www.401k.org/
http://en.wikipedia.org/wiki/401%28k%29