5 Reasons Not to Borrow from Your 401k

Times are tough for some.

But are they tough enough to resort to borrowing from your 401k?

Does a job loss warrant this kind of move?

I guess, like all personal finance, it really depends on your particular situation.

Still, generally speaking, the 401k should likely not be looked at as a normal, everyday way of financing a lifestyle that’s above your normal means. This means no borrowing to buy a boat, new TV, or for a home improvement.

If you want those things, it would be wiser to just save up the money in a savings account.

Need some convincing? Here’s a few reasons not to borrow from your 401k:

It’s For Your Retirement

The whole reason you set this account up to begin with was to save money for your retirement. If you’re not retired yet, just leave this money alone. Had you set some money aside to borrow from at a later point, I’d say go ahead.

But this is your 401k. Just leave the money, and your original intentions alone.

It Won’t Be There For a Real Emergency

If you yank that money from the 401k now using a loan option to finance some frivolous purchase, and then everything hits the fan, you’re left in a tough spot. Leave that money alone and save the loan option as a extreme last resort.

The Borrowed Money is Not Growing

Money that isn’t in the 401k account (the borrowed amount) can no longer see investment growth. It’s gotta be there to be earning for your retirement. This is long-term investing we’re dealing with here. Letting it ride is key. Moving money in and out defeats the purpose.

The Loan is Tied to Your Job

This is one of the more obvious reasons for staying away from the 401k loan. If you leave your job for any reason, most companies will require you to pay that loan back at a much faster rate, or even immediately. You don’t want to be stuck holding this loan if you get canned.

Remember, you borrowed because you didn’t have enough money to begin with. So what makes you think you’ll be able to pay it back quickly? Studies show that a majority of the people who leave their job with an outstanding 401k loan, end up in default.

Fees and Contributions Limits

Some company plans require that you stop contributing to your 401k once you borrow from it. Also, some plans tack on fees to the loan payments. These are definitely things you want to avoid.

Discover the cost of your 401k loan using this free calculator from our partner Personal Capital.

401k Loan Calculator | Personal Capital

Plug your numbers into this free calculator from Personal Capital and see how much that 401k loan could cost you.

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My Experience

I was tempted to borrow from my 401k a couple of years back when we were saving up for our first home down payment. I was worried we would need a small 401k loan to get us over the 20% mark. The option to borrow was definitely very enticing.

But in the end, I decided to leave the money alone. And you know, we ended up being able to save the 20% anyway by working a bit harder at spending less.

So that’s my take, what’s yours? Should you borrow from your 401k?

Avatar About Philip Taylor, CPA

Philip Taylor, aka "PT", is a CPA, blogger, podcaster, husband, and father of three. PT is also the founder and CEO of the personal finance industry conference and trade show, FinCon.

He created Part-Time Money® back in 2007 to share his advice on money, hold himself accountable (while paying off over $75k in debt), and to meet others passionate about moving toward financial independence.

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  1. I have a great opportunity to purchase a house at half price with the help of HUDs good neighbor next door program. The house is 80000 and I’d get it for 40000. I owe 8000 that must be paid off before even being prequalified. I have two retirement account from two different school districts. One of them I can’t contribute to anymore, but I get the interest (about 1000 per year). The other one I’ve borrowed from this year to pay off a debt. Wouldn’t it be a good idea to take the money out of the first one, pay off the debt from the second one and pay off that 8000 so I couled buy a half price home? I’d already be saving 40000 on home and the amount I have in the first account is only 25000. I would love any advice from people who know about this stuff.

  2. Yesterday I had the oportunity to reivew my husband’s quarterly 401K statement and I realized that the entire time he has owned his 401K his return on investment has been right at 0%.
    So I had an idea.
    If he borrows $10,000 from his 401K he will be paying it back with interest, which to my understanding will be added to the balance of the 401K account. If we deposit that money into our rewards checking account which has a 3.52% APR, won’t we come out ahead?
    It seems like 3.52% is better than 0%.
    And if he looses his job and has to pay the money back immediatley, we’ll just take it out of the rewards checking account and pay it back.

    • Avatar Philip Taylor says

      The stock market will not return 0% over the long term. If you borrow, you will lose out on any market gains while that money is out of the account. The stock market is a long-term play, and your money needs to stay invested to receive the full benefit of the market, taking advantage of every up and down.

  3. I have a considerable amount of credit card debt (amassed over the years from various unfortunate events; no new debt in the last 6 years!) and am on the edge of looking into bankruptcy relief. However, I have a substantial 401k account. I have been with my employer for several years and feel my job is fairly stable. I’m considering taking out small loans and repaying them back in short periods of time and applying the loans towards paying off my unsecured debt. The low interest (paid to me) and the scheduled repayment makes it a very enticing option. I’m 35 and feel I still have time to make up the loss in retirement money. Can you comment on my situation? I’d appreciate your opinion.

    • Avatar Philip Taylor says

      Rod, I like the sound of your strategy IF you are going to do the 401K loan. That’s a smart way to do it. Little loans lessen your risk. They also delay the payoff though.

      However, I don’t think you should do the 401K loan.

      My experience is that in most cases like this, you can pull up your boot straps and crush this debt with your own efforts (i.e. selling things, extra jobs like pizza delivery, etc.). We’re capable of great things when we put our entire energy and focus into it. I would encourage you to go after this debt with an intensity like never before.

      If you’ve been able to avoid debt over the past 6 years, then it would seem that you can make changes and pay down the debt fairly quickly.

      That said, I am in favor of reducing your interest rate while you are in the process of paying down the debt. I used 0% balance transfer credit card to achieve this. I’ve seen others do the same through peer lending.