If you're like most Americans with a 401k plan, you've worked to put away as much of your hard-earned dollars as possible. But as the saying goes, life happens. And when it does, you may find yourself needing to tap into your 401k retirement saving before you actually retire. The following are three reasons why withdrawing money out of your 401k retirement savings account - even as a loan - may not be such a good idea.
Early withdrawal 401k penalty and taxes
If you withdraw money from your 401k retirement savings account before you reach age 59 ½, you'll be hit with a 10 percent early withdrawal penalty. In addition, you'll be required to pay regular income taxes on the withdrawal. Note: there are certain situations where the penalty may be waived. For more information, visit the IRS Website.
Immediate loan payoff if you leave your job
If you quit, or get fired, and have an outstanding loan, 401k plans may require that you repay the loan within 90 days of departure. Failure to pay the loan in full within the specified timeframe of your plan may result in it being considered a payout, which is subject to applicable taxes and penalties. You might be able to take the cash you need as a withdrawal (instead of a loan), but then you might be subject to the 10 percent penalty, depending on your age.
Missed growth in retirement savings opportunities
Not only is the money that you borrowed from your 401k missing out on any potential growth, but every future contribution that you're not making isn't growing either. According to Investopedia.com, "The extraordinarily low interest rate that you are paying to yourself with your loan payment is likely to be a pittance in terms of return on investment when compared to the market appreciation that you could be missing."
Remember, the money in your 401k retirement savings is meant for your retirement. If you spend it now, you risk jeopardizing your financial security at a time when you need it the most.