2 Important Tips On Borrowing From 401k Plans
#1 – Cheating Your Retirement
Borrowing from 401k plans in a financial pinch may sound like a good financial strategy in the short-term but is it the right move for the long-term? Never forget why you invest money into your 401k plan…for the day you want to leave the work force, namely, retire.
Your working years are more valuable than you realize. You only have so many working years to save up enough money to retire. The money you save during your 40 working years will have to be enough to support you during 30 years of retirement. The only money that will be waiting for you at retirement will be the money you send ahead. Borrowing from your 401k is working against yourself, it means that you are cheating your retirement. No one cares about your retirement more than you do so be careful before borrowing from your 401k plan.
#2 – 401k Loans Dent Your Retirement Income
Unless you repay a 401k loan, borrowing from your 401k plan will put a dent in your retirement income. Any 401k loan that goes unpaid is considered a distribution or withdrawal by the IRS, therefore, it is subject to income taxes and possible penalties. Of course you intend on paying back the loan; but, what if you lose your job?
At the time of a job loss or job change, 401k loan balances will have to be paid back in full within 60 days. 401k loans are repaid through payroll deductions; if you no longer receive a paycheck you need to repay the entire balance at one time. If you are in a financial pinch finding enough money to cover a loan may be difficult.
Always be prepared and expect the unexpected. If you are thinking about changing jobs or could be downsized find another source of money besides your 401k plan.