Should You Borrow From Your 401k?

Real Estate

Should You Borrow From Your 401k?

 

     LOAN

 

Pros:

+ A 401(k) loan doesn't appear on your credit report.

+ The interest on these loans is some of the lowest out there — right now, 3-4 percent.

+ You’re paying yourself the interest, not the bank.

+ You’ll get your money more quickly than a home equity loan.

+ Since it’s a loan, you will not be charged the 10 percent early withdrawal penalty plus the income taxes you would have to pay if you withdrew the money.

+ You don’t have to qualify for the loan because in effect, you are the lender.

+ No assets or collateral are needed to secure the loan.

 

Cons:

- You are forfeiting the accrued interest you would earn if your money stayed in the 401(k).

- The interest you pay back to your account is not tax deductible.

- Some plans do not allow contributions to the 401(k) for the period of the loan.  Some employers won't allow a loan on a 401k plan while you are employed with them!  Check the details of your plan carefully before signing the paperwork.

- If you lose or quit your job, the loan is often due in full in 30-60 days (although some plans are open to renegotiating the terms of the loan. Find out before you sign the papers.)

- If you default on the loan, it is considered a withdrawal and you will owe a 10 percent penalty plus a hefty tax payment.