Don’t Bor­row From Your 401(k)

The Saratogian (Saratoga, NY) - - BUSINESS -

If you need to get your hands on some money, it can be tempt­ing to bor­row from your 401(k) ac­count. Re­sist that urge, though, be­cause do­ing so means short­chang­ing your fu­ture fi­nan­cial se­cu­rity.

First, un­der­stand how 401(k) loans work. Typ­i­cally, you’re al­lowed to bor­row up to 50% of the vested funds in your ac­count, or up to $50,000 — which­ever is less. You’ll gen­er­ally be ex­pected to make pay­ments on the loan (plus in­ter­est, which goes into your ac­count) at least ev­ery three months, and you’ll have to pay the loan back en­tirely within five years. (If you bor­row the money to buy a home, the term of the loan can be longer.)

If you don’t pay back the loan on time, any re­main­ing bal­ance will be con­sid­ered with­drawn, and it will be tax­able in­come. Plus, if you’re with­draw­ing be­fore age 59 1/2, you’ll face a 10% early with­drawal penalty. Note that if you leave your job for any rea­son, the loan will be due for full re­pay­ment. All that might sound doable to you, but many bor­row­ers find that it’s harder than they ex­pected to re­pay the funds on time, per­haps be­cause other fi­nan­cial emer­gen­cies come up.

Any money you re­move from your ac­count for a few years — or for­ever — won’t be able to grow for you dur­ing that pe­riod. So be­fore bor­row­ing from your 401(k), ask your­self whether you re­ally need the money. If it’s for a kitchen re­model or a big-screen TV, just for­get it. If you do need it — per­haps for a ma­jor car re­pair or be­cause you’re sud­denly out of work, see if you can get the money else­where, such as by tak­ing on a part-time job.

Try not to cash out your 401(k) when you change jobs, ei­ther. Even if you have saved only a modest sum there, leav­ing it to grow can make a big dif­fer­ence in the fu­ture. A $25,000 ac­count that grows for 20 years, av­er­ag­ing 8% growth an­nu­ally, will end up worth about $116,500.

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