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Just Because You Can Borrow From a 401(k) Plan Doesn't Mean That You Should

According to the Wall Street Journal, the number of Americans taking loans against their 401(k) plans is increasing because most plans allow participants to borrow funds to purchase a home or to avoid foreclosure.

But just because the avenue is there, though, doesn't mean that borrowing from a 401(k) is a good idea. 

Here's why: When you put money into a 401(k) plan, you use pre-tax dollars but when you repay a 401(k) loan, you use post-tax dollars. 

Therefore, if your tax rate is 28%, it takes $1,388 of income to repay each $1,000 increment of your loan.  Then, when you withdraw the funds at retirement, the money is taxed again.

Double-taxation is costly, but the other less-well-known impact of a 401(k) loan is that you can lose the long-term power of compounded interest on your entire portfolio. 

This isn't to say that a 401(k) loan is bad, it just may not be right for you. So, if you're planning to withdraw from your 401(k), be sure to talk with a qualified financial professional first.

If you'd like a referral to a trusted professional, call or email me anytime.