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.
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?