First, the good things about borrowing money from your 401(k).
- You can use this money to pay off credit cards. This will probably save you interest expense, which can be as high as 20 percent or more on some cards.
- Money borrowed from your 401(k) is no longer subject to market risks. If values drop in the market this will not affect your values.
- Borrowed money is not subject to income tax.
- You are borrowing from yourself so you will recapture principal and interest payments. These payments are not gone forever like when you borrow from a bank or creditor.
Now comes the bad things that happen when you borrow from your 401(k).
- You lose gain on borrowed money if the market climbs higher.
- If you quit working for your employer, the loan must be repaid. If not you must pay an “early distribution” penalty of 10 percent, plus ordinary income tax on this loan amount.
Here is what I see happen all too often: A person gets tight on money so they use their credit cards to make up the difference, but then money keeps getting tighter until the person can’t even pay their credit cards. So the discussion with self goes like this:
“I am so stupid to have allowed myself get into all this credit card debt. I will use my 401(k) to pay all this off and then my payments will drop and I promise myself I will never do this again!”
Most people that do borrow money from their 401(k), do so only to catch up on debt payments, not to pay off existing debt entirely. This is called “saving to spend” money. This is NOT savings. If you save money and then play catch up all the time, you will not have money at retirement.
Go to www.moneymastery.com and find out how you can have a true savings plan that will last your lifetime. Spending a bit of time and $4.95 a month to explore the site could be worth at least $100,000 to you at retirement. Beyond that, it will bring you all of the following as well:
- Immediate control of your spending.
- An additional $100-$300 per month in extra money you didn’t know you already have.
- The ability to get out of ALL debt, including your mortgage, in under 10 years.
- Peace and control at home, no more arguing with your partner.
I urge you to take advantage of a simple financial management program that promises a return on investment of 200,000 times what you will pay to learn about it. You decide, but do it before you take out more 401(k) loans. Contact me for help today, firstname.lastname@example.org.