I’m often asked: Is it ok to borrow money from your 401(k) plan to cover other financial needs?
Almost a quarter of employees who have 401(k) retirement savings accounts are using them as piggy banks. However, the potential retirement and tax booby-traps may not be so evident.
Let’s first acknowledge that there are situations where a family faces an unexpected and overwhelming need for cash that must be met. If there are no other resources available, borrowing from one’s 401(k) plan is generally superior to withdrawing the money. If withdrawn, the funds would be subject to income taxation and would no longer be available for retirement.
401(k) participants can borrow up to one-half of the value of their accounts, to a maximum of $50,000, and avoid taxation of the amount borrowed if repaid on a timely basis.
Recognizing this, it’s generally a good idea to avoid borrowing from your 401(k) plan if you can. Here are three reasons why:
Consider a 401(k) loan as a loan of last resort. For most people, it’s difficult to put money aside for retirement. Once you put it aside, you do not want to jeopardize it before your retirement. While a 401(k) loan has some benefits, a loan should be avoided unless facing a genuine financial emergency.
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