What you need to know
The terms of the loan, and whether you’re eligible at all, are determined by the rules governing your employer’s retirement plan. Some plans allow loans with few strings attached, while some don’t allow loans at all. Others only allow borrowing for specific purposes, such as buying a home, paying for funeral expenses or paying for medical expenses. Think long and hard about the pros and cons of these loans before jumping in.
- Less paperwork than most other kinds of loans, and no credit check.
- The interest rate is usually lower than for other loans — usually the prime rate plus 1 percent — and you’ll be paying yourself.
- Credit is unaffected if you default.
- There’s usually a limit on what percentage of the 401(k) account’s assets you can borrow.
- You’ll be paying interest to yourself, but you may still end up with less money overall because you’ll be missing out on market gains.
- You’ll be taxed twice — once on the after-tax dollars used to pay the loan back, and once when you withdraw the money after age 59½ .
- If you lose your job, you must pay the loan back quickly, usually within two months.
A 401(k) loan can have far-reaching consequences for your retirement. Before borrowing, ask yourself these three questions from the Bankrate feature, “Need money? You could tap your 401(k) …“:
|1.||Why do you need a loan?|
|2.||Do you need to spend the money now, or can you wait until you’ve saved more cash?|
|3.||Is there an alternative?|