Should You Borrow From Your 401k?
A question that comes up often is "should I borrow from my 401k in order to purchase a home?" There is no one size fits all answer to this, but here are some pros and cons to consider when deciding if it's the right choice for you:
l A 401(k) loan does not appear on your credit report.
l The interest on these loans is some of the lowest out there—right now, 3-4 percent.
l You’re paying yourself the interest, not some bank.
l You’ll get your money more quickly than a home equity loan.
l Since it’s a loan, you will not be charged the 10 percent early withdrawal penalties plus income taxes you would have to pay if you withdrew the money.
l You don’t have to qualify for the loan because in effect, you are the lender.
l No assets or collateral are needed to secure the loan.
l You are forfeiting the accrued interest you would earn if your money stayed in the 401(k).
l The interest is not tax deductible.
l Some plans do not allow contributions to the 401(k) for the period of the loan.
l If you lose or quit your job, the loan is often due in full in 30-60 days (although some plans are open to renegotiating the terms of the loan. Find out before you sign the papers.)
l If you default on the loan, it is considered a withdrawal and you will owe a 10 percent penalty plus a hefty tax payment.