6 Reasons You Should Never Borrow From Your 401K

You’ve reached a point in your life where you have to fork over some cash for a major expense or a down payment on a home. You’re told that one option available to you is to borrow some money from your 401k. That sounds like a plan, right?

Wrong. As a rule of thumb, you should never borrow money from your 401k. Here’s why.

1. You’ve Stopped Saving

The whole point of a 401k account is to save money, specifically for retirement. When you borrow money from it, you’re not saving any longer and instead you’re using the savings like a checking account that you can pull money out of whenever you want.

Instead, find a way to raise the cash another way so that you don’t have to borrow it against your retirement. Look for an additional source of income or cut unnecessary expenses. You’ll be glad you didn’t borrow against your retirement savings when you hit your golden years.

Also, get a loan payoff calculator and determine how long it will take you to pay off the 401k loan. You might find that it’s just not worth it when you run the numbers.

2. You Are Wasting Money on Interest

When you borrow money, you’re going also have to pay interest. That’s cash straight out of your pocket.

On the other hand, when you keep your money in a 401k account and don’t borrow against it, you’ll earn income from dividends, short-term capital gains, long-term capital gains, and interest.

3. You’ll Feel Double the Pain if You Miss Payments

If you borrow money against your 401k now and later find yourself in hard times where you can’t make your monthly payments, then your loan is going to be viewed as a distribution. That’s very bad for your financial health because it means you’ll pay income taxes on the amount you borrowed plus a 10% penalty. In other words, you could make your life a lot worse.

4. You’re Confined to Your Current Job

Don’ forget that your 401k account is tied to your employer. That means if you borrow money against the 401k and decide to tell your boss to take this job and shove it, you’re might owe the entire balance of the loan when you quit.

That could be very painful. You might have to get another loan to pay off the money you took from your 401k. If you served in the armed forces, you could be eligible to get a loan from Navy Federal Credit Union.

5. You can Lose Your Nest Egg

There might come a time when you actually have to borrow money from your 401k for emergency purposes. However, if that time hasn’t arrived and you simply want to access that money, let your money ride.

If you borrow against your retirement savings just because you can, you’re deducting from your liquid assets and that could come back to bite you once you are ready to retire.

6. You Living Beyond Your Means

If you have to borrow from your 401k to buy something, then that is a sure sign that you’re living beyond your means. You might need to exercise a little financial discipline and keep your spending habits in check.

Yes, you are allowed to borrow against your 401k. However, that doesn’t mean it’s a good idea. In many cases, it’s best to leave your retirement money alone and find another way to raise the cash.