Borrowing from Your 401(k)
It is common today for employers to allow workers to take loans from their 401(k) account. While employers are not required to permit these loans, in any given five-year period, as many as 40 percent of employees may borrow money from their 401(k) accounts.*
When you borrow from you 401(k), you must pay back the loan plus interest. When taking a loan from a retirement account sponsored by your employer. It is important to keep in mind that if you leave your job for any reason, that loan becomes a withdrawal. As such, it is then subject to income taxes and a 10 percent penalty. ** This can be a difficult situation if you lose your job due to an unexpected termination and have no immediate income alternative.
A recent study revealed that employees are more inclined to borrow from 401(k) accounts that allow them to take out multiple loans at the same time.*** Not only can it be challenging to pay back that debt, but in many cases employees may stop contributing to their 401(k) during the repayment phase. As a result, many people may be acquiring more debt while no longer saving for the future – which means their retirement assets may also be at risk.
Carefully consider the merits – and financial repercussions – before borrowing money from a 401(k) account. This is a resource that should be reserved for hardship situations, not for revolving debts as you would with a credit card.
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*Knowlege@Wharton, Borrowing from the Future: 401(k) Loans and Their Consequences, April 8, 2014.
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