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More people using their 401(k) as a loan

Consumer Reports News: June 08, 2011 04:28 PM

In 2010 about one in seven workers borrowed money from their 401(k) plan. Currently, about 30 percent of all 401(k) holders also have an outstanding loan. That percentage is the highest in recent history, according to data from Aon Hewitt, a human-resources consulting group.

According to some of the companies that manage 401(k)s, the number of people borrowing from their plans has gone up from last year. T. Rowe Price and Vanguard Group reported 11 and 14 percent increases last year over 2009, respectively.

Though borrowing from a 401(k) can be easy, it comes with risks. For example, you only have 60 days to pay back the money in full if you lose your job. If the loan is considered an early withdrawal, you'll face income tax and penalty fees.

As our sister site Consumerist recently reported, a proposed bill would severely limit people's ability to take out a 401(k) loan. Bill co-author, Senator Herb Kohl of Wisconsin, put it this way: "While having access to a loan in an emergency is an important feature for many participants, a 401(k) savings account should not be used as a piggy bank."

Would you use your 401(k) if you needed to borrow money? Do you know individuals who have done so?

In a report for Consumer Reports Money Advisor, we outline why you may want to resist the lure of a 401(k) loan. For situations that call for emergency cash, you can follow some of our guidelines for tapping your assets without paying too much in penalties and taxes. You'll see that tapping your 401(k) is listed as the last resort.

Leakage of Participants’ DC Assets: How Loans, Withdrawals, and Cashouts Are Eroding Retirement Income 2011 [Aon Hewitt]
Loans From 401(k)s Are on the Rise As Investors Tap Their Inner Banker [Wall Street Journal]
Bill Aims To Stop People From Using 401(K) As A Piggy Bank [Consumerist]

Maggie Shader

   

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