Borrowing From Your 401K

Have you refinanced your home into oblivion? Tapped out every available money resource with a myriad of loans and credit cards? There is one last option: borrowing from your 401(k).

If you've never heard of this option, it is because until recently, it just was not done that frequently. But, with the market still not fully recovered, and people desiring to cut their high interest debt, more folks are discovering this alternative lending source.

Pros:

• A 401(k) loan does not appear on your credit report. They are not reported to Experian, and do not become a part of your credit history.
• The interest of these loans is some of the lowest out there.
• You're paying yourself the interest, not some bank.
• You will get your money more quickly than if you were using another means of borrowing
• Since it is a loan, you will not be charged the 10 percent early withdrawal penalties plus income taxes you would have to pay if you withdrew the money.
• You don not have to qualify for the loan through the usual long, painful credit approval process, because in effect, you are the lender.

Cons:

• The biggest con is that you are forfeiting the accrued interest you would earn if your money stayed in the 401(k). Calculated over the long term, it can cost tens (even hundreds) of thousands of dollars in potential gain.
• Unlike a home equity loan, the interest is not tax deductible.
• Some plans do not allow contributions to the 401(k) for the period of the loan

Some more things to consider...If you lose or quit your job, the loan is often due in full in 30-60 days (although some plans are open to renegotiating the terms of the loan. Find out before you sign the papers.)

If you default on the loan, it is considered a withdrawal and you will owe a 10 percent penalty plus a heft tax payment. So, if you had borrowed $50,000 and could not pay it back, you would have to pay a $5,000 penalty and federal and state taxes that could take another $20,000 of the amount.

Copyright 2013 Keller Williams® Realty, Inc. If you have a brokerage relationship with another agency, this is not intended as a solicitation. All information deemed reliable but not guaranteed. Equal Opportunity Housing Provider. Each office is independently owned and operated.