Borrowing Money From Your 401k

Borrowing Money From Your 401k

If you run out of options to borrow money, tapping your 401(k) plan is always a viable option. But how safe is it to lay your hands on retirement nest egg. As financial advisors we think it isn’t wise to reach for it, unless all other options stand closed.

Let’s first look into how much you can borrow from 401(k) plans. Most 401(k) plans allows you to borrow up to $50,000 provided you haven’t borrowed from the plan. If the loan is not for buying ones primary residence, it has to be paid off within 5 years. Those who leave their job will have to repay the loan immediately. If not, they would have to pay taxes on the remaining balance.

If you are hard pressed to take money from 401(k) plan, make sure it should in no way affect your retirement earnings. You can ensure this in the following ways:

You must have the means to repay:

If you have no means to repay the money, then your retirement income would go for a toss. So it is highly advisable to leave contributions at where they are. And if there is a company match to the contribution then you have more reasons to leave it untouched, else you would lose it too.

Do not take out money from your 401(k) to pay education costs:

Many people borrow against a 401(k) to pay for college. When loans are easily available for colleges, tapping 401(k) for money would be a foolish move. Money in your 401(k) plan should be allowed to sit and grow, so that you can reap the benefits when you don’t have a source of income.

Never pay off credit card debt with 401(k):

Never use 401(k) to pay expenses particularly credit debts. This can turn into such a deadly habit that you may end up messing your retirement investment completely.

No matter what the reason is, if you take out money from your retirement savings make sure you keep current on repaying the money at the first opportunity.