Should You Borrow from Your 401(k)?

The average household with credit card debt had a balance of $15,983 in 2017, nearly eclipsing the peak of $16,900 in 2008.¹ With the average credit card annual percentage rate sitting at 14.9%, it represents an expensive way to fund spending.²

Which leads many individuals to ask, “Does it make sense to borrow from my 401(k) to pay off debt or to make a major purchase?”³

Borrowing from Your 401(k)

  • No Credit Check—If you have trouble getting credit, borrowing from a 401(k) requires no credit check; so as long as your 401(k) permits loans, you should be able to borrow.
  • More Convenient—Borrowing from your 401(k) usually requires less paperwork and is quicker than the alternative.
  • Competitive Interest Rates—While the rate you pay depends upon the terms your 401(k) sets out, the rate is typically lower than the rate you will pay on personal loans or through a credit card. Plus, the interest you pay will be to yourself rather than to a finance company.

Disadvantages of 401(k) Loans

  • Opportunity Cost—The money you borrow will not benefit from the potentially higher returns of your 401(k) investments. Additionally, many people who take loans also stop contributing. This means the further loss of potential earnings and any matching contributions.
  • Risk of Job Loss—A 401(k) loan not paid is deemed a distribution, subject to income taxes and a 10% penalty tax if you are under age 59½. Should you switch jobs or get laid off, your 401(k) loan becomes immediately due. If you do not have the cash to pay the balance, it will have tax consequences.
  • Red Flag Alert—Borrowing from retirement savings to fund current expenditures could be a red flag. It may be a sign of overspending. You may save money by paying off your high-interest credit-card balances, but if these balances get run up again, you will have done yourself more harm.

Most financial experts caution against borrowing from your 401(k), but they also concede that a loan may be a more appropriate alternative to an outright distribution, if the funds are absolutely needed.

  1. NerdWallet, 2017 American Household Credit Card Debt Study
  2. NerdWallet, 2017 American Household Credit Card Debt Study
  3. Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2018 FMG Suite.

Share |
 

Related Content

Retirement Redefined

Retirement Redefined

Around the country, attitudes about retirement are shifting.

Your Changing Definition of Risk in Retirement

Your Changing Definition of Risk in Retirement

A change in your mindset during retirement may drive changes to your portfolio.

Investment Strategies for Retirement

Investment Strategies for Retirement

Investment tools and strategies that can enable you to pursue your retirement goals.

Contact

Parkersburg Office
225 College Parkway
Suite 101
Parkersburg, WV 26104

Phone: (304) 422-3531
Fax: (304) 428-6222
Toll Free: (800) 422-4644

Wheeling Office
21 Warden Run Road
Suite 201
Wheeling, WV 26003

Phone: (304) 230-2384
Fax: (304) 230-2385
Toll Free: (866) 266-5955

Email Our Team

Securities offered through Securities America, Inc. Member FINRA/SIPC. Advisory services offered through Arbor Point Advisors, LLC. Commonwealth Financial Services, Securities America Inc., and Arbor Point Advisors LLC are separate entities.

This site is published for residents of the United States and is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security or product that may be referenced herein. Persons mentioned on this website may only offer services and transact business and/or respond to inquiries in states or jurisdictions in which they have been properly registered or are exempt from registration. Not all products and services referenced on this site are available in every state, jurisdiction or from every person listed.

Disclosures