Retirement Planning

Borrowing Against Your 401(k) May Not Be a Good Idea

Borrowing against your 401(k) can be tempting. But you need to weigh all the consequences. Here's what you need to consider.

Borrowing From 401k Plans: 3 Reasons Why It Isn't a Good Idea

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, despite a slow-to-recover economy. 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 withdrawal 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 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. Now, again, you could 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.

For more information on saving for retirement, visit the Protective Learning Center.

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All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

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Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax-related decisions. For information about Protective Life and its products and services, visit www.protective.com.

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