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Why do we argue against 401(k) loans? There are many reasons. First, you diminish the growth of your assets in the plan. And once you take it out, your money misses having enough time to grow.
And there are other downsides: While you're not contributing, you miss any employer match. And many plans say that if you lose or leave your job before age 59½, you must repay the money in full within 60 days or face ordinary income tax on the outstanding amount, plus an early-withdrawal penalty of 10 percent. Repayment in a pinch might require liquidating other investments, possibly at a loss.
Is there any benefit to taking a loan from your 401 (k)? Yes. With a 401(k) loan, you're both the borrower and the lender; you pay yourself the required interest from your loan repayment through a pretax payroll deduction.
A 401(k) loan might work if you know for a fact that your job is secure; can predict how markets will move; will be 59½ during the loan period; and don't have other options, such as home equity. Still, the negative effects outpace any benefits. Larry Rosenthal, a financial planner based in Manassas, Va., strongly urges using other options before digging into your retirement plan. "You can't just turn your retirement account into an ATM machine," he says.
Visit our retirement planning guide to prepare for financial security in your golden years.
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