Borrowing from your 401(k)

January 14, 2012

What are the disadvantages of borrowing money from your 401(k)?

  • If you don’t repay your plan loan when required, it will generally be treated as a taxable distribution.
  • If you leave your employer’s service (whether voluntarily or not) and still have an outstanding balance on a plan loan, you’ll usually be required to repay the loan in full within 60 days. Otherwise, the outstanding balance will be treated as a taxable distribution, and you’ll owe a 10 percent penalty tax in addition to regular income taxes if you’re under age 59½.
  • Loan interest is generally not tax deductible (unless the loan is secured by your principal residence).
  • You’ll lose out on any tax-deferred earnings that may have accrued on the borrowed funds had they remained in your 401(k).
  • Loan payments are made with after-tax dollars.

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