Pros and Cons of 401(k) Loans

by | Oct 24, 2019 | News | 0 comments

 

Lately, the 401(k) has been getting a ton of fame—and rightfully so. This tool can help save thousands for retirement—something many Americans need help with as 6 in 10 are behind on savings.1 This account is meant to fund your retirement and has strict rules to ensure its purpose. Penalty-free withdrawals begin at age 59 & 1/2, meaning your money is locked in until then. But you can borrow some of the money in the account. Most 401(k)s are eligible for loans. Technically, you’re borrowing from your money and paying interest to yourself.

Sounds great, doesn’t it? I hate to break it to you, but it’s not all efficient. Many people advise against this while others take loans often. As always, we’ve gathered the facts so you can make an informed decision. Remember to check with your custodian for loan information.

 

Pros

No Loan Application

Because you’re essentially borrowing your own money, you won’t need to go through the rigorous loan application process. You will have to fill out some paperwork with the administrator, but you’ll skip lengthy credit checks, references, tax returns, etc. 

No Credit Score Minimum

Since this isn’t a traditional loan, your credit score won’t matter. Even low credit borrowers can get approved, depending on the account’s policy. This can make a huge difference for those with low credit scores or minimal assets.

Automatic Pay Back

Are you nervous about paying the loan back? Your auto-contributions will go towards the loan and interest until it’s paid off.

Interest Goes in Your Pocket

The interest you’re paying ends up in your pocket, meaning you’ll avoid losing money on high-interest loans.

 

Cons

Lost Growth

Pulling investments can result in lost growth. Despite only taking a portion of the balance, you may lose gains because the money will be gone for at least a short period. You may also lose earnings on potential contributions you would’ve made if you weren’t paying off the loan.

Penalties

Your administrator can penalize you for several things. Of course, if you don’t pay the loan pack you’ll be hit with fees and the loan may even be considered as a withdrawal, which is hit with more fees and taxes. If you leave your job, voluntarily or not, the repayment will be accelerated to the nearest tax return due date, though you may file for an extension.

Jeopardize Retirement

Borrowing from your 401(k) will most likely affect your retirement savings. Though it is possible to bounce back, depending on the loan size it may take longer than you’d expect. Experts say retirees need at least $1,000,000 saved for retirement, and the number grows with inflation and lifestyle changes.

What now?

You have the facts to help you decide, but sometimes that still isn’t enough. Consider the purpose of the loan and the necessity of the purchase or money. There may be money hiding in places you didn’t even know. Perhaps there’s a more efficient loan tool.

Your best bet to informed decision making is finding a financial consultant. This person can present scenario projections, retirement savings vehicles, and more. Schedule a time to chat with us today—RGA offers financial consultants, retirement experts, a tax specialist, attorneys, and more to help you achieve your best retirement! Click here, call 1-800-467-8152, or email info@ronaldgelok.com to kick-start a retirement savings conversation.

 

            Sources

      https://www.thebalance.com/pros-and-cons-of-borrowing-money-from-your-401-k-2388219

      https://vittana.org/17-pros-and-cons-of-401k-loans