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Disadvantages Of Borrowing Against A 401K

5 Reasons To Never Borrow Against Your 401K

We have all heard various investment strategists discuss the benefits of borrowing from our 401k plans. Lower interest rates and paying yourself back (with interest!) are the two biggest benefits to this type of loan. While it may seem like a sound borrowing technique, there can be some significant negative effects of taking out a participant loan on your long-term retirement savings plan. Knowing the risks can help you make the right decision for your situation. Here are 5 reasons to never borrow against your 401k.

Plan Savings Come To A Halt

Most retirement plans have stipulations that prevent borrowers from making additional contributions as long as there is an outstanding loan balance. Even if you are still allowed to make contributions, it may prove very difficult to pay back the loan and continue to save in your plan. The best way to ensure you have enough money for your retirement is to leave it alone until you do retire.

You’re Actually Losing Money

Not only are you not saving while paying back your participant loan, the money you’ve taken out of the account is no longer growing. That low loan interest you’re promised pales in comparison to the potential ROI of the market. In short, you’re losing money now, which translates into the losing future money as well.

Penalties

Should you find that you are unable to pay back the participant loan for any reason, the loan may actually be deemed a withdrawal. Any type of withdrawal from your fund could be hit with all sorts of penalties and taxes. Once again you’re losing money.

Trapped At Your Job

Many borrowers don’t realize that their retirement plan stipulates they must repay the loan once they leave their place of employment. This can often mean staying at a job longer than you’d like simply because you don’t have the money needed to put back what you’ve taken out.

Lifestyle Red Flag                   

Most importantly, having to take money out of your 401k plan can be a significant sign that you are living beyond your means. Redoing your budget and adjusting your spending habits can have far less of a negative impact on your overall savings strategies.

Do you want to hear more about saving to your 401k retirement plan? Contact The Payroll Company today!