The economy all over the world right now is a tight one. People are always looking for different ways to get extra cash and often times they need the extra cash quickly. This is where borrowing from your 401K plans might come in handy. Some will say that it is a good idea while others will tell you to avoid it because it might be a dangerous financial move. In this article you will find out why it could be both a good and a bad financial situation.
If you select to borrow from your 401k you will find that the interest rate you will be given is a very low interest rate. Not to mention that when you are paying the interest it goes directly back into your 401k-retirement account. For this reason you might think that this is one of the better installment loan options you may have. Of course it will all depend on your financial situation as well.
The repayment plan of borrowing from your 401k-retirement account is where things start to get tricky. The general rule is that you will be required to pay back the loan in full within a five year time period. If you do not the loan will be treated like you cashed out and then you will have additional penalties that you will be required to pay. The other requirement is that if you leave your job for any reason and you are making payments the balance of what is remaining on the loan will be treated as if you cashed out of your 401k.
Many people often wonder why everyone is so negative about cashing out. It is often considered by many as being a free loan because the money is already yours to begin with. However what many do not realize is that you will be required to pay state and federal taxes as well as a penalty for an early withdrawal. This could add up to at least thirty or forty percent of the balance. Of course that will depend on what tax bracket you fall into.
Your Job Security
You might not be thinking at this moment that you will be leaving your job anytime soon at least not within the next five years. However you never know what can happen. You might get another job offer or your spouse could be relocated to another state. Anything can happen and when it does you will be paying a heavy price for the money you still owe on the 401K loan.
As you can see borrowing from your 401K is a risky financial plan. Even if you pay the money back within the five-year time period and you face no penalties what you do not think about is the money that you are losing towards your retirement. This is because there will not be any new deposits into your account while the loan is outstanding. Of course taking a loan from your money is better than cashing out but you will need to be sure that you weigh all options before making this decision.