A loan from your 401(k) may seem like an easy alternative when it comes to accessing funds during an emergency or a hardship, but there are factors you should know and consider before doing so.
- When you withdraw funds from your 401(k) as a loan you are pulling your money out of the market and paying yourself back at a fixed rate. Yes, in times of a down market you may actually have a decent return but over the average 5 year period of a loan, you could miss out on tremendous growth.
- When you contribute to your 401(k) those contributions (excluding Roth contributions) are pre-tax allowing you a tax savings come time to pay Uncle Sam each year you contribute. When you take a loan you are paying it back with after tax dollars. When you pull the funds at retirement, you will then be paying tax on that same money again, ultimately amounting to double taxation on the same money.
- CNBC noted that “When people take a loan, they typically stop saving. They can’t afford to pay back the loan and continue, regular contributions at the same time”. Saving for retirement is difficult enough and if borrowing. Ceasing contributions only hinders and exasperates the retirement savings dilemma.
Emergencies happen, it’s that thing called life. Take steps to prepare for that surprise bill or set back by paying yourself weekly into a savings account. This one small step will save you in the long-run and help protect your retirement assets.