What You Need to Know About Borrowing from Your 401(K)
You plan for your retirement and save money, often times in a 401(K) account where you work. It is a wise investment option because you receive pre-tax benefits. In addition, many employers actually contribute to their employee’s 401(K) accounts, helping the balance to grow significantly over time.
Even though you work very hard to save your money, you may encounter financial difficulties throughout life that require you to borrow. If you do not have cash reserves, you may need to borrow against a revolving loan product that you already have established. You may opt to apply for a new loan, such as a personal loan, line of credit, home equity loan or a home equity line of credit. You may also choose to borrow money from your 401(K) account.
Most 401(K) plans allow you to borrow against your own investment; the money that you have already saved in your 401(K) account. Members may choose this route for a variety of reasons, such as convenience, attractive repayment terms or possibly as a last resort due to credit history or other financial circumstances.
While there are benefits to borrowing against your 401(K) account, it is not without consequence. For example, if you don’t make a payment for 90 days, that money is considered a distribution and taxed as income. Plus a 10% penalty is applied if you are under age 59½. Also, if you choose to leave your job, you must repay the loan within 60 days or incur those same penalties.
While it may seem like you are borrowing your own money and for free, it really is not. The money that you are borrowing is not earning any interest until it is paid back. Plus, the interest payments that you are paying on the 401(K) loan are not tax deductible*, as they would be with a home equity loan. These are some of the costs associated with borrowing from your 401(K). You are also undoing the hard work that it took to build your retirement savings account in the first place.
Many members borrow against their 401(K) accounts, and that number seems to be growing by leaps and bounds. We understand and would also encourage you to keep in mind that we offer borrowing and refinancing solutions at UECU. We can look at your circumstances and help you to determine the best financing option. You may choose a personal loan to pay off a smaller 401(K) loan or a home equity loan to pay off multiple or large 401(K) loans. Since some 401(K) loans can require large payments, refinancing may help you with cash flow. Paying off your 401(K) loan will also enable you to continue to grow your retirement savings.
*Consult your tax advisor regarding interest deductibility.
For additional information or to refinance your 401(K) loan, contact a Financial Services Consultant at 800-288-6423, ext. 4001.