The purpose of your 401k investment is to help get you ready to retire at the lifestyle level that you are planning for and dreaming about.
When you take out 401k loans against the balance of your 401k investment you are defeating the entire purpose of your 401k investment. Your 401k account is not a revolving savings account that you go to whenever you need money to buy something. Your 401k account is intended to prepare you for your perfect retirement.
If you are in the habit of spending your 401k money and don’t save any money for your retirement, where do you think the money will come from when you are retired? The only amount of money that will be waiting for you at your retirement will be the money that you sent ahead; never forget that.
Let’s get you on track towards building up your 401k retirement account. You want to be ready for retirement when it gets here; you don’t want to keep working, do you? Let’s look at the pro’s and con’s of 401k loans.
Why You Should Not Take A 401k Loan:
The Con’s of Taking Out A 401k Loan:
- You stunt the growth of your 401k account.
- You eliminate the power of compounding growth while your money is an outstanding loan.
- For the power of compounding to work, there must be a balance in the account; the higher the balance the greater the power of compounding.
- If you keep taking money out of your 401k account, there is no balance to grow from.
- Loans can get expensive.
- If you do not pay back your loan, you will be taxed on the outstanding balance.
- If you are under age 59 1/2 and don’t repay the loan, you will be taxed plus subject to a 10% withdrawal penalty on the outstanding balance.
- If you unexpectedly lose your job, you will have to repay the outstanding loan with in 60 days.
- A 40k loan cannot be rolled over to an IRA.
- Interest on the loan is not tax-deductible.
- The payment terms on the loan are not flexible.
- 401k loans usually have to be paid back within 5 years.
The Pro’s of Taking Out A 401k Loan:
- There are not many good reasons to take out a loan.
- It’s convenient.
- It is easy to administer, usually just a few forms to fill out.
- The interest rates are generally reasonable.
- Before you pull the trigger and take out a loan against your 401k balance, you may first consider stopping your current 401k contributions.
- The money you save from stopping your contributions can be used for whatever financial need you needed the loan for.
- Consider other sources of funds that are not subject to taxes and penalties.
- Stop spending.
- It’s not what you make but what you keep that will put you ahead financially.
Your 401k retirement investments are for your future. YOU must commit to making regular contributions to your 401k account – – – not taking out 401k loans.
If you take 401k loans, you will not have any money when you do retire. The only money that will be there when you get there is the money that you sent ahead; so loans decrease your retirement money.
Your 401k investment will be your source of funds at your retirement. If social security is not available when you retire; your 401k account may be your only retirement money.
If you manage your 401k account properly and resist all temptations to take out 401k loans you will have the dream retirement that you have been planning during your working years.