Retirement Plan Loans: Do They Make Sense for You?
If you have a 401(k) plan and are looking to finance a car, home, or other major purchase, you may be able to "borrow from yourself" by tapping into your retirement savings. Under IRS rules, 401(k) participants can borrow half the amount in their account, up to a maximum of $50,000. Participants with less than $10,000 in an account may be required to provide collateral. Generally, loans must be repaid within five years. Specific terms of the loan will be determined by your company, which may allow you to make payments on a loan through payroll deduction.
Simplicity and privacy are considered benefits of 401(k) plan loans, and interest rates are generally competitive. Although the interest you pay on a plan loan is not tax deductible, it goes directly into your 401(k) account and can then continue to grow for your long-term needs.
But there are drawbacks to consider before borrowing from your 401(k). If you leave the sponsor company before you fully repay the money, you will be required to pay the balance within 30 days or pay federal income taxes on it. You would also be charged a 10% early withdrawal penalty by the IRS on any pretax contributions or earnings withdrawn. Plus, many companies charge fees for 401(k) plan loans. You should also take into consideration the opportunity cost of borrowing from a 401(k) plan -- the long-term cost of any potential return youll miss out on by borrowing from your retirement savings.