April, 2005
Borrowing against your 401(k): A mistake you should avoid.

Many people feel this is a way to come up with large sums of cash on short notice instead of running up their credit cards or paying interest to another lender. Some will use their 401(k) monies to pay education expenses, home business expenses, wedding expenses, etc. Most workers do not realize that they are putting their retirement money at risk. The problem arises when that employee gets laid off or fired. In that case the loan must be paid back in full usually within a few weeks. If this is not possible, then the outstanding balance is treated as an early distribution, and is then subject to heavy taxes and a hefty distribution penalty fine to the tune of thousands of dollars. Additionally, you have part of your retirement now that is now gone forever, and cannot be replaced.

The Bottom Line: Avoid tapping into your 401(k) funds. If you find that you must do so, then (1) borrow only the minimum that you need; and (2) try to pay it back as soon as possible.

 

These articles are in intended to be general guidelines and information to the public.  Be sure to consult with your tax professional regarding your specific situation.