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Should You Take Out A 401k Loan?

401k’s are one of the most popular retirement plans offered by employers in the United States with nearly 80% of full-time, eligible employees taking advantage of the program. These plans allow employees to put money away toward their retirement pre-tax, and often offer an “employer match.” Unfortunately, many working professionals view a 401k as a sort of secondary savings account; one they can withdraw from in a crisis if they take out a 401k loan when finances get tight. However, this is not at all the way that professionals today should view their 401k’s. So, should you take out a 401k loan? 

Should you take out a 401k loan?  

Many would argue in support of this “it’s my money and I can use it how I want to,” mentality. But withdrawing from your 401k (although entirely possible), is not at all in your best interest over the long-term. That’s because borrowing from your 401k likens to borrowing from your future. And this can have a significant negative impact on future planning needs if done in excess or if not repaid. The answer to whether or not you should take out a 401k loan is a resounding “no”.

Additionally, many people don’t realize that with a 401k, you’re required to make payments every 90 days. If you don’t do this, that money will be considered a distribution and will be taxed as income and you may be hit with a nasty 10% penalty if you are under 59 ½ years old.

So even though the IRS technically will allow you to borrow up to $50,000 from your account, that doesn’t mean you should take out a 401k loan. Borrowing from your 401k today could seriously impact your retirement tomorrow.

Do you know someone who thinks they should take out a 401k loan? Still have questions about your savings and retirement? See more of our updates each week on our LexION blog. And don’t hesitate to reach out to us with questions about how our services might be right for you.