Borrowing from a 401k: 3 Reasons to Rethink a Loan
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Borrowing from a 401k: 3 Reasons to Rethink a Loan

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June 22, 2016

Written by: Kristin Gross​, Asset Building Coach at La Casa de Esperanza

According to Money magazine, approximately one-third of Americans are tapping into their retirement savings early for a loan. Forty-six percent use that money to pay off debt and 35% cited experiencing a financial emergency. Others surveyed used the loaned money to purchase a home, do renovations, or pay for a wedding. While this can seem like a really good idea at the time because 401k loans have low interest rates, there are 3 big reasons you may want to rethink dipping into your nest egg before you retire.

  1. Repayment plan is non-negotiable. If you are hit with another financial crisis you won’t be able to stop or delay payments on a 401k loan. The only way you can stop payment is by discontinuing your employment.
  2. Repay in Full: If you do lose your job, you will be required to repay the loan within 60 days in full. If the loan isn’t repaid you will face a 10% penalty on top of the additional income taxes you will pay on it.
  3. The actual true cost of your 401k loan will be higher than what you borrow. The loan factors in the amount of interest lost over the life of the retirement account. This calculation also assumes the borrower stopped their 401k contributions while the loan was repaid. A $10,000 loan may end up costing you $77,111 by the time you pay it off.

If you are thinking about borrowing from a 401K loan to pay off your credit cards or remodel your home this is a steep price to repay. As an alternative, try establishing an emergency savings account today, so when a financial crisis happens does happen you won’t have to dip into your nest egg. 


Kristin Gross is an Asset Building Coach for the Financial Stability Initiative at La Casa de Esperanza, in Waukesha, Wisconsin. The Financial Stability Initiative is a partnership between La Casa de Esperanza and the United Way of Greater Milwaukee & Waukesha County. Kristin has her Bachelor’s degree in Personal Finance from the University of Wisconsin – Madison. She is a financial coach and educator working with individuals and families on obtaining tools for financial capability by meeting basic needs, building savings and gaining assets. She enjoys sharing her knowledge of personal finances to positively impact the lives of others.

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