After years of hard work and steady saving, you have accumulated a sizable retirement fund. Then a life crisis hits, and you need money right away. Someone suggests tapping into your 401(k) fund to take care of the problem, and it's starting to sound like a good idea. After all, it's your money, right?
It's easy to see how a 401(k) loan could sound like a good idea. You're borrowing from yourself, not a bank, and it's money you've already earned. What could go wrong? Actually, you might be surprised at how many things could go wrong! Borrowing from your 401(k) fund could backfire in the following ways:
You aren't just taking principal out of the account. You plan to repay the money you're borrowing. However, you can never repay the time that money is missing from your account. You will lose all of the interest that would have accumulated on that money, and you can't ever reclaim that. It's gone.
Speaking of lost time... Under the terms of most 401(k) loans, you can't make contributions to the account while you're repaying the borrowed amount. So you're losing valuable time that you should be saving toward your retirement, possibly at toward the end of your career when you need to be saving the most!
You could trigger serious consequences. If all goes as planned, you will repay your loan, lose some time saving toward retirement, and lose the interest that would have accumulated on that money. That's the best-case scenario. In the worst case, you might default on the loan, and that could result in a 10 percent withdrawal penalty during an already rough time for you. Ouch.
You might miss valuable opportunities. Under the terms of most 401(k) loans, you must immediately repay all of the borrowed money if you separate from your employer. That might not sound like a big deal now, but what if you want or need to take a new job in the future? You could receive a lucrative offer from another company, but be forced to turn it down if you don't have cash on hand to repay your loan.
Taking out a loan might not solve the real problem.Normally, by the time you face the temptation to borrow from yourself, you have ignored a larger problem for far too long. Are you living beyond your means, or failing to adequately prepare for a rainy day? If you borrow from yourself this time, but fail to change your spending and saving habits, you might face another emergency in the near future. Then what will you do?
Taking out a 401(k) loan often means digging a deeper financial hole. Rather than making this big mistake, try to find some other way to solve the problem. For more help with financial decisions, large or small, call our office to schedule a consultation. We specialize in helping people just like you find the solutions that work for them.
15244 - 2016/1/12
Carstens Financial Group focuses on providing comprehensive asset management, estate planning and life insurance solutions. Allow us to help you secure your financial future.